Government to examine taxation loophole

Finance Minister Michael Cullen yesterday signalled that the Government would move to prevent New Zealand investors from using certain investment vehicles to escape tax.

In a speech delivered on his behalf by Associate Revenue Minister David Cunliffe to the Institute of Chartered Accountants, Cullen referred to a New Zealand resident investing in New Zealand Government stock through an Australian unit trust and possibly not paying tax.

An identical investment through a New Zealand vehicle would be clearly subject to New Zealand tax.

From the Government's perspective this was unacceptable and, if necessary, the loophole would be closed.

As a first step, an issues paper would be released in October for consultation on proposals to deal with this and other problems that arose under the foreign investment fund rules.



"As I understand it, the arrangement works something like this," Cullen said. "A New Zealand resident purchases units in an Australian unit trust, and the unit trust uses those funds to buy, for example, New Zealand Government bonds. Interest from the bonds is paid to the Australian unit trust, with only a 2 per cent levy deducted.

"Because Australia, unlike New Zealand, taxes the entity as a trust rather than as a company, the interest is not taxed in Australia because it is not sourced in Australia and does not relate to an Australian beneficiary."

The unit trust distributed its income by way of non-taxable bonus issues so that the New Zealand investor ended up with more units. Because of the way New Zealand and Australian tax law inter-related, no New Zealand or Australian tax was payable at this stage either.

"Gains that New Zealand residents derive from the eventual sale of their units may, however, be taxable, depending on whether the investment was held on capital or revenue account.

"But regardless of the intricacies of the capital versus revenue law, the main point is that New Zealanders may be able to derive interest from New Zealand Government bonds virtually tax-free if they invest through one of these Australian unit trust structures."

That was unacceptable.