Rethink urged on portfolio tax plan

The Government should take a fresh look at a proposed overhaul of the tax treatment of portfolio investments, says the organisation representing workplace superannuation schemes.

The proposed changes, detailed in a discussion document earlier this year, mean that people who invest in New Zealand companies through managed funds rather than by holding the shares directly or through passive funds will no longer have their returns eroded by a capital gains tax. If they invest in foreign companies through managed funds they will still be subject to a capital gains tax as they are now.

The Association of Superannuation Funds yesterday issued the second of its two submissions on the discussion paper. It believes the proposals would add new distortions such as an apparent, tax-driven bias towards investment in New Zealand instead of overseas shares.

It also argues there would be significant administrative complexities that would increase the overall costs, including tax, of investing in collective investment vehicles.

"We really don't think that what they're proposing actually achieves the objectives that they wanted which is to remove tax from the equation in terms of investors making decisions," said association vice-chairman Jill Spooner. "We think it probably makes it worse than where it is at the moment."

While the association believed domestic collective investment vehicles such as super funds should be encouraged, it also believed it was good for New Zealanders to have overseas investment opportunities through collective vehicles, something which would be discouraged if the proposals were adopted.

The association believed the Government should adopt a "first principles" approach.

That would mean treating all collective investment vehicles similarly for tax purposes from the perspective of individual investors, no matter what country the vehicles were based in.

Further, the tax the individual investors paid on their investment in a collective investment vehicle should be similar to what they would pay normally on a directly held investment.

The association also said it was concerned that the proposed changes appeared to be being rushed through in time for the introduction of the Government's KiwiSaver scheme, which it saw as "a case of the tail wagging the dog".

"Given the complexities of the changes required, the proposed implementation date of April 1, 2007 seems unrealistic."