Cullen closes Australian unit trust tax loophole

By ELLEN READ

Thousands of New Zealanders could face higher tax bills as the Government moves to close a loophole allowing people to avoid paying tax on income from Australian unit trusts.

Changes closing a technical gap in the way dividend tax rules operate are being added to the taxation bill before Parliament.

Because of the way the New Zealand and Australian tax systems interact, investors here can legally pay almost no tax on their returns. But not for much longer.

"At present, New Zealand beneficiaries of offshore unit trusts - which are frequently Australian - can avoid paying tax on dividends by agreeing in advance to [a dividend reinvestment plan] distributed as a tax-free bonus issue of new units," Revenue Minister Michael Cullen said. "That is patently unfair when identical investments in New Zealand products would be subject to income tax."

The Government will change the country's tax rules to make sure that amounts reinvested in unit holders are treated as taxable dividends and issues of units will be excluded from the definition of bonus issue, Cullen said.

New Zealanders have about $3 billion in Australian unit trusts that don't make a cash payout, but instead reinvest dividends as new units. Closing the loophole will earn the Government $25 million to $30 million in tax revenue.

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