More money for back pockets

Income earners may have been disappointed with Finance Minister Michael Cullen's damp squib of a Budget. But many of the 200,000 or so investors who hold managed funds could be in for a sizeable improvement in returns thank to changes to the tax treatment of their investments.

Managed funds have capital gains taxed as well as income - which mean real returns to investors can be paltry.

Under the new system, which comes into force on April 1, 2007, a $100,000 investment say, in the Fisher Funds NZ Growth Fund, which last year grew to $126,000, would instead have grown to $139,000.

What's more, investors will be charged tax on funds' income at their marginal tax rate rather than a flat 33 per cent. Lower earners in the 15 per cent and 21 per cent tax brackets will benefit.

Vance Arkinstall, chief executive of the Investment Savings and Insurance Association, says those paying 39 per cent marginal tax will suffer on the surface.

But, overall, they will be better off - thanks to the removal of capital gains tax.

The changes will bring the tax treatment of managed funds in line with that of direct equities and passive funds such as the Fonz and Mozy funds, which are traded on the NZX rather than sold by fund management companies.

A cautious Cullen delayed making a decision on the tax treatment of overseas funds, which are subject to capital gains tax. New Zealand equivalents are free of capital gains tax.

A consultation paper will be released and changes effective from April 1, 2007.

Meanwhile, the KiwiSavings account is the Budget darling as far as private investors go. But it falls short of providing any sort of tax breaks, compulsion or employer contribution, which would have made it very enticing.

Institute of Chartered Accountants' acting tax director Duncan Fraser says a $1000 deposit comes as a sweetener in lieu of tax breaks, which are used in other countries.

Long term, $1000 invested as a lump sum along with 4 per cent of the median earnings of $31,907 invested monthly at a modest 6 per cent rate of return annually over 45 years will grow to a lump sum of $291,757 or $567,134 at 8 per cent.

A first home deposit subsidy of $1000 a year, up to a maximum of $5000, will make it easier for some first home buyers and those who do raise a deposit may be entitled to use a mortgage insurance scheme announced in the Budget.

It's what the Government didn't do for the investors that riles Jeff Matthews, senior financial adviser at Spicers Wealth Management. He said those earning under $96,500 would be better off in Australia.

Matthews said the Government ought to look at its own inflation calculator on the Reserve Bank's website and it would see that the top threshold should have been $68,000 today, not in three years' time, giving them something to cheer about today.

Even so, the country's 213,117 self-employed people will have more in their back pockets.