Australia to be grey list of one

Investment into Australia will be exempted from plans to change the tax treatment of overseas portfolio investment, Finance Minister Michael Cullen indicated yesterday.

He told National Radio: "We are almost certain to move to a position where we will treat investments in Australia from New Zealanders as if they are investments within New Zealand."

The Government's proposal to abolish the grey list of seven countries, which get preferential treatment under existing rules - in effect imposing a capital gains tax on realised gains in the value of overseas investments - drew fierce opposition.

So the Government has been seeking feedback on a modified proposal that would make an exception of Australia, in effect retaining a grey list of one, when only dividends are taxed.

The other main change would be to give investors into other countries the option of being taxed on an earnings-a-share basis rather than on the change in the market value of the investment between the beginning and the end of the year.

The regime applies above a threshold of $50,000 but where the investment does not amount to a controlling stake.

It would still not be entirely identical treatment of investment in New Zealand and Australia, because of Canberra's refusal to countenance mutual recognition of franking or imputation credits, where a shareholder is able to claim a tax credit for his or her share of the underlying company tax paid.

But it is a lot better than the proposed unrealised capital gains tax.

For the other countries on the grey list - Britain, Canada, Germany, Japan, Norway and the United States - investors will be able to choose between:

* A deemed rate of return, when an investment is assumed to have earned a given return and the investor is taxed on that.

* The capital-value method, where any rise in the market value of the investment between the beginning and the end of the year is taxed.

* Taxation based on earnings per share.

PricewaterhouseCoopers tax partner John Shewan said that for some companies taxing earnings per share would be pretty much the same as taxing the change in market value, when the latter closely reflected the former.

But for investments in technological stocks whose share prices reflected expectations of sharply rising future earnings, the tax impost could be substantially lower.

TAXING TIMES

* The "grey list" consists of seven countries, including Australia.

* Investments in those countries have received preferential tax treatment.

* Government plans to drop that treatment have met fierce opposition.

* It is now proposing to exempt Australia, meaning only dividends will be taxed.