Government eyes migrant tax breaks

By BRIAN FALLOW, economics editor

The Government may give immigrants and returning expatriates a tax holiday on their overseas income.

Finance Minister Michael Cullen told the Institute of Chartered Accountants' tax conference in Christchurch yesterday that some people who come here to work might find themselves facing tax on overseas income that they might otherwise not have faced.

In many cases their New Zealand employers have to pay them more to compensate for that.

The tax review, chaired by Rob McLeod, recommended such people be taxed only on their New Zealand-sourced income for the first seven years.

"We are also considering widening it to include returning New Zealanders who have been out of the country for at least 10 years and who come back to work here," Cullen said.

"I tested the proposal with members of the institute's London branch on my recent overseas trip and got a very warm reception."

The Government has not decided how long the tax holiday should be. A discussion document on proposals for reducing tax barriers to international recruitment would be released in the next few weeks, he said.

Deloittes tax partner Thomas Pippos said a tax break to aid recruitment did nothing about the flipside of the issue - retaining existing talent in New Zealand.

"The international competitiveness arguments are equally applicable in that context."

The larger issue, Pippos said, was New Zealand's foreign investment fund rules which discourage residents from investing outside New Zealand other than than in companies within our largest traditional trading partners.

Cullen said the Government would soon release a paper presenting options to reform the taxation of New Zealanders' investments in overseas equity.

One of the options would be the risk-free return method proposed by the McLeod review.

But he finally killed another McLeod proposal, a concessionary tax rate for inbound foreign direct investment.

"Applying different tax rates to foreign direct investment that depend on the date of the investment is not sustainable as a permanent feature of the tax system.

"Moreover, the costs of implementing such a measure even on a temporary basis are likely to outweigh the benefits, especially in view of the mobile nature of the investment it would likely attract."

Cullen reiterated the Government's intention to change the tax laws relating to newspaper masthead sale and leasebacks, where deductions are taken for what are, in effect, repayments of principal.