Stobo to look at tax options on investments

By BRIAN FALLOW

Craig Stobo, the former head of BT Funds Management, has been given the task of forging a consensus on how to overhaul the tax treatment of investment products.

"My job is to try and make sure people are aware of the options, the pros and cons thereof, and basically arrive at a position everyone is broadly happy with," Stobo said.

His mandate from Finance Minister Michael Cullen is to resolve inconsistencies in the tax laws, particularly as they relate to portfolio investors (those owning less than 10 per cent of a company or other entity).

"I don't have any illusions about how difficult it is. I have been on the inside and understand the issues. Having said that there is a strong view that where we are now is not palatable."

He said the three main areas where issues arose were the boundaries between capital and revenue, and between domestic and foreign vehicles, and differences between a saver's personal marginal tax rate and the rate at which his or her savings vehicle was taxed.

But the terms of reference put the larger features of the tax landscape off limits.

Any reforms will have to sit within the overall TTE (taxed, taxed, exempt) model - no savings-related tax concessions.

No across-the-board capital gains tax either, and the family home is off limits.

Stobo made it clear his remit did not extend to rental property either.

"I am pretty much focusing on managed funds, not direct assets. So whatever we come up with for managed funds there may still be a boundary with direct investments. Rental properties as a direct asset do not come within the terms of reference."

The McLeod tax review recommended the risk-free return method (RFRM) as a way of cutting through the tangled knot of anomalies in the tax treatment of savings vehicle.

Under RFRM investments would be deemed to have earned a return equal to the after-tax return on risk-free assets like Government stock - around 4 per cent - and that would be taxed. In good years that would look like a bargain. In years when markets return poor or negative returns, it would look like a wealth tax.

"Intellectually the RFRM method is appealing," Stobo said. "It solves a number of boundary issues. However, it has some arguments against it as well. I'm not ruling RFRM out. The issue is really to ensure people understand what options are available and what are the pros and cons of each of them and to arrive at the path of least resistance."

Stobo has to report back to Cullen by the end of October.

He left BT Funds Management in March after 14 years with the company. During his period as chief executive and before that chief investment officer, BT's funds under management increased from around $10 million to $3.5 billion, according to Morningstar.

"Since I left BT I have been having a wonderful time. I've been enjoying myself thoroughly doing all those things you don't get to do while you have a full-time corporate job."