Budget 2005: Tax shift will leave $100m in the kitty

The sharemarket is in line for a $100 million-a-year boost from 2007 under tax changes announced in yesterday's Budget.

The Government is abolishing tax on gains made on the sale of domestic shares by managed funds.

"The estimated cost of this tax cut is about $100 million a year," Finance Minister Michael Cullen said - money which managed funds won't pay in tax so will remain in the fund available for investment.

This provision removes the tax on active funds, giving them a level playing field with domestic passive funds.

"It's positive for the funds management industry," said Fisher Funds chief investment officer Warren Couillault.

He said if Fisher Funds bought one share for $1 at the beginning of the year and at the end of the year it had gone up to $2, it would be liable to pay tax on the $1 gain.

"But if I held that share individually, there would be no tax. So there's been quite an advantage to people trading personally, or holding shares personally, versus putting them into an actively managed fund."

As well as removing one tax, the Budget also introduced voluntary changes in how managed funds will be taxed. Both are due for introduction in 2007.

Instead of a fund paying a flat 33 per cent rate, it will now pay according to each investor's marginal tax rate.

"The estimated cost of this tax cut is $25 million," Cullen said.

This initiative will benefit low tax payers (who will effectively now pay the equivalent of 19 per cent, rather than a flat 33 per cent on their investment) but is not so good for higher earners who will now be eligible to pay the higher 39 per cent tax.

Steven Giannoulis, ING chief executive, said the Budget announcements represented some things the industry had been lobbying for for 20 years.

"Lots of people in the industry are thinking wow, this is fantastic."

NZX chief executive Mark Weldon said the changed taxation environment encouraged savings - which, in turn, would benefit the stock exchange.

He said on a wider level, companies should find it easier to access capital and at a lower costs.

The Budget announcements were encouraging of managed funds and equity investments - but, at some point in time, the Government would need to address what savings instruments were available.

Weldon said the change in tax regulation surrounding securities lending was also going to be "positive" for the market.

Securities lending involves the lending of shares to another party for a fee. The changes will bring local tax rules governing this practice into line with Australia's and involved removing the tax barriers to the practice, and introduce new rules to stop securities lending being used for tax avoidance.

BT Funds boss Mark Smith said: "[The Budget] is all really as the funds management and finance industry expected.

"I don't think anything there has come as a great surprise but I think everyone generally would support the initiatives being introduced.

"The tax neutrality on domestic investment is certainly something that levels the playing field."

As for the tax treatment of overseas investments, Cullen said this was proving more difficult. Now, overseas share investment is taxed differently depending on the country in which the investment is made.

If a direct equity investment is made in a "grey list" country (Britain, Australia, the United States, Canada, Germany, Japan and Norway) it is excluded from the foreign investment fund rules. If it is not, then the rules which tax accrued capital gains apply. They contain four methods for calculating the investment.

Cullen said changes including a move to a version of a "risk-free rate of return" method for calculating the tax had been considered but rejected as administratively complex.

"Officials are now focusing instead on an income calculation system based on actual shifts in value," Cullen said.

Details would be outlined in a forthcoming discussion document.

Finance professionals had not expected this to be dealt with yesterday, because of the issue's complexity.