Small tax changes - big growth opportunities for funds management industry

Two small tweaks in our tax law could transform New Zealand into a magnet for international investment management, say Chapman Tripp partners Tim Williams and Casey Plunket.

“It’s a no brainer.  The changes should increase our tax take and provide an important growth platform for the New Zealand funds management industry – creating new job and export earnings opportunities in the financial services sector,” they said.

The Chapman Tripp proposals entail:

  • Providing conduit tax relief, like that in Australia, where overseas investors do not pay tax on foreign investments which are managed here on their behalf.  Tax should be only on the New Zealand management services fee; and
  • Amending the PIE tax regime for funds which distribute their earnings so that overseas investors are taxed on their distributions at rates they would pay if they held the fund investments directly.  Up to the double tax treaty limit of 15 per cent, Australians should get a credit for the New Zealand tax paid.

“While our new PIE and Fair Dividend Rate tax rules make investing in Australia attractive for New Zealand investors, they penalise Australians who invest in New Zealand based funds.  This is because the 30 per cent tax on income a New Zealand fund pays on behalf of foreign investors is not only higher than the Australian tax rate in many cases, it also does not even reduce the tax payable by the investor in Australia.

“Naturally, this undermines any Australian interest in New Zealand funds”, Tim Williams says.

Casey Plunket points out that the philosophy of the new PIE tax regime, which is to tax fund investors as if they held the fund investments directly, has not been carried through to the treatment of non-residents.

“There is no good basis for taxing non-residents on non-New Zealand income.  Where the fund’s income does have a New Zealand source, there is a basis for New Zealand taxation of the income, even where the income is earned on behalf of the non-resident investor.  However, the current tax treatment of that income is much harsher than if the non-resident had earned it directly.

“If an Australian invested directly into New Zealand shares or bonds, New Zealand tax would be limited to either 15 per cent (on dividends) or 2 per cent (on interest).  Furthermore, the 15 per cent New Zealand tax on dividends reduces the Australian tax payable,” he says.

Although New Zealand’s securities framework was relatively efficient and low cost, the New Zealand funds management industry had failed to derive  any substantial benefit from Australasian securities law mutual recognition because of our poorly constructed international tax rules.

“We can’t attract Australian money into New Zealand funds and build much needed scale unless the tax outcome is neutral.  These relatively simple tax changes would achieve that and make New Zealand a very favourable location for managed funds,” they said.

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Related topics: Tax; Funds; New Zealand productivity

Funds, KiwiSaver & superannuation; Tax

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