MPs looking at overseas tax options

MPs hearing submissions on changes to the taxation of overseas share investments have asked officials to look into an alternative proposed by PricewaterhouseCoopers.

The proposal is so far removed from what is in the bill that the fact it is under consideration may be a sign that the ferocity of the opposition the legislation has encountered is causing second thoughts in high places.

It resembles the risk-free return method advocated by the tax review headed by Rob McLeod in 2001.

Instead of taxing 85 per cent of unrealised capital gains on overseas share investments, it would tax either the dividends received or - as a proxy for dividends - 3 per cent of the average market value. The average market value would be the simple average of the value at the start and the end of the year.

Neither realised nor unrealised capital gains would be taxed, bringing it in line with the treatment of similar investments in New Zealand and Australia, and it would apply whether the shares were held directly or through managed funds.

The proposal was outlined by PricewaterhouseCoopers chairman John Shewan to Parliament's finance and expenditure select committee on August 30 and in a subsequent note to the committee.

Committee chairman Shane Jones said: "We have asked officials to look at a range of options, including that one."

The committee was only a third of the way through hearing the submissions the bill had elicited and was a long way from making up its mind.

"It is not unusual for us to give our advisers more work to do."

Shewan said new rules on overseas investment were needed but would only work if they were accepted as fair and reasonable by the taxpaying community.

"The widespread concern that greeted the proposal to tax 85 per cent of unrealised capital gains demonstrates that in the eyes of investors percentages anywhere near these levels are perceived as being excessive, as they go well beyond being a proxy for dividends that might otherwise have been expected to be received," he said.

Shewan said his proposal might also be labelled a capital gains tax as it was calculated by reference to current market values.

"The logical response is that the Government's focus is on collecting tax on dividends and this is no more than a fair and reasonable back-stop in cases where people have significant investments (above $50,000) and no or minimal dividends are received."

It might also be criticised for applying even when the investment fell in value but dividends were already taxed even when the share price fell, Shewan said.

Fair shares

Mary's shares in Offshore Inc:

Market value at April 1, 2007: $3000

Market value at March 31, 2008: $4000

Average market value: $3500

Fixed rate of return @ 3 per cent of average market value: $105 (A)

Dividends received: $50 (B)

Mary pays tax on the higher of A or B: ie $105

If her personal rate is 33 per cent, she pays $35 tax