Murray Brewer: Change tax rules to entice rich migrants

Predictions by Statistics New Zealand that net migration could top 20,000 this year "if not stronger", reinforces the urgency for Government to overhaul our international tax rules.

As the world economic storm begins to subside, New Zealand, with its stable government and sound banking structure, is an increasingly attractive haven for many high-net worth individuals.

Our international tax regime is nothing more than a "revolving door" for these people, who could really make a difference to our country as permanent residents.

Unfortunately our unique tax regime presents a significant barrier to entrepreneurial and wealthy individuals who were born here and those who could be attracted to live here by the New Zealand lifestyle with its focus on "taxing the crumbs."

Just a cursory examination of the National Business Review's "rich list" will reveal that the "big boys" are just not "playing" in our sandpit any more.

A major reason for this self-imposed exile is the adoption by New Zealand of some strange tax rules that are way out of step with global norms and that are a "turn-off" for potential wealthy migrants and for Kiwis living and thriving aboard.

These peculiar tax barriers include the Foreign Investment Fund (FIF) rules and Financial Arrangement tax rules, which tax people, not only on their income, but also on the value of their foreign-held asset base - even when they have no money coming in from these investments.

Under the tax environment someone can have an overseas share portfolio and, if the New Zealand dollar drops faster than the falling share prices, the portfolio holder still has a taxable gain because our tax rules assess the portfolio in New Zealand dollar terms. This commonly causes a cash flow problem where the investor has no realised cash from the investment to pay the tax. To add insult to injury there is no tax "refund", when the exchange rate moves the other way.

Such tax rules enforce a "back door capital gains" tax - except that this is harsher than any other "capital gains" system in the world because it taxes gains that may never be realised.

On the positive side, we do have a tax concession for people immigrating here for the first time or for Kiwis returning home after at least 10 years of non-resident tax status.

This is called "transitional resident status" which grants automatic tax exemption on overseas investment income for four years. The special status ends on the last day of the 48th month after the time the person acquired New Zealand tax resident status. After the expiry, the person's foreign-sourced investment income becomes liable to income tax in New Zealand.

The problem is that any new immigrant and returning Kiwi who meets the 10-year non-resident test knows they will get a four-year exemption and after that, they will face the full impact of our tough tax regime when the likes of the FIF and Financial Arrangement rules come into play.

Immediately the four years of tax exempt status on overseas assets ends, many holders of foreign investments and assets will return overseas, many to Australia which also has tax concessions for new immigrants. In some instances the Australian tax concessions on foreign income and capital gains can be permanent and for many wealthy investors (including many Kiwi passport holders) huge tax planning advantages may arise from emigrating to Australia. Australia's approach makes sense when considering the need for many Western countries to focus on the global competition for skills and capital because of declining birth rates and ageing populations.

In many cases the choice is to leave and to stay away from New Zealand. The downside is that the investor would otherwise have happily invested other funds in substantial New Zealand-based business assets but for the adverse New Zealand tax hit on a global asset base.

By removing or reforming such onerous international taxation rules, we will have a better chance of enticing wealthier Kiwis home and bringing in new, skilled migrants with some of their foreign capital. These are the people we need on our side when we focus on growing our economy and leveraging off the future global rebound.

* Murray Brewer is tax director with Grant Thornton, Auckland.mbrewer@gtak.co.nz