Tax changes a boon for many

Many indirect investors in international shares who expect to be worse off under the Government's proposed tax changes will, in fact, be better off.

The negative aspects of the changes have received more publicity than the positive, leaving people misinformed.

Those whose tax burden will be lighter are investors in many share funds and in many of the balanced funds, growth funds, work superannuation funds and other popular savings vehicles that invest a portion of their money in international share funds.

Whether an international share fund will be helped or hurt by the changes depends on whether it is an active fund or an index fund - managers choosing which shares to buy and sell or simply holding all the shares in a market index.

Under the present law, index funds do not pay tax on their capital gains, but active funds do.

If the proposed changes go ahead as planned next April 1, that difference will end. Instead:

* Index and active funds will not pay tax on gains if they invest in New Zealand or Australian shares.

* Both will pay tax on 85 per cent of their gains if they invest in foreign shares beyond Australia.

The changes will considerably reduce returns on international index funds, especially in years when their newly taxable capital gains are high.

But international active funds will switch from being taxed on 100 per cent of their capital gains to 85 per cent. When capital gains are high, this change will boost net returns considerably. Those in the 19.5 per cent bracket will benefit from being taxed at their own rate, rather than the present 33 per cent tax applied to all managed funds.

International index funds will not end up worse off than their active counterparts. They will merely move from a favourable position to a neutral one.

Investors in active and index funds end up paying the same tax under the new regime.