KEY POINTS:
Tax experts say the revised version of the Government's overseas investment tax plan is far too harsh and has "rough edges" which will require further work.
Parliament's finance and expenditure select committee yesterday issued its report on the bill, which contains measures to tax overseas share investments on a "fair dividend rate" basis.
The committee has endorsed the Government's proposal to tax investors on 5 per cent of their portfolio's opening value each year, despite receiving many submissions saying the figure should be set lower.
PricewaterhouseCoopers chairman John Shewan said he was disappointed the committee had stuck with 5 per cent.
"I think that's a mistake. In time, the Government and the Inland Revenue Department, as well as taxpayers, will agree it was a mistake because it is too high a rate relative to the yields that people are deriving on overseas equities.
"Five per cent is well above the average rate. We'd made a strong submission for 3 per cent, and I think there's a world of difference.
"Inevitably this will be seen by some as a capital gains tax in drag or a wealth tax."
Shewan said the rate was unfortunate, as the new legislation would get off to a bad start because of it.
"It could have been widely accepted had it been truly a fair dividend rate."
Deloitte tax partner Thomas Pippos said much of the bill was a step forward, because it removed distortions that favoured direct investment over that through managed funds.
But rough edges remained.
Despite Government denials that the fair dividend rate had elements of a capital gains tax, the capital gains criticism could be made "to the extent that rate is perceived to be greater than what is fair", said Pippos.
"Worse than this, it could be said that the fair dividend rate is no more than an asset tax given the total disconnect to the actual income derived from the foreign portfolio investment."
Pippos also criticised the fact that although individuals will not pay tax on their overseas investments in years when they sustain losses, they cannot carry those losses forward.
Therefore they will pay tax on gains as their investment recovers to its pre-loss levels, when "economically all you're doing is putting yourself back in the same position you were before", he said.
Some direct investors' concerns would be eased by the decision to retain the five-year exemption from the new rules for Guinness Peat Group shareholders, but others were still likely to resent being taxed as if they'd earned a 5 per cent dividend return when they received less than that.
Generally, managed funds would be much better off than they were now.
But for tax professionals the bill was a mess.
"It's incredibly disappointing that this level of structural change to the tax act was largely determined in the select committee outside of the generic tax policy process," Pippos said.
"No one will ever say that doing this at the select committee is the right thing to do."
The new law would have "a bunch of rough edges", some already visible, others which would develop.
"They will inevitably have to make changes down the track."
MPs' feedback
* Parliament's finance and expenditure select committee has reported back on the tax bill, which make changes to the tax treatment of overseas share investments.
* The committee has endorsed the Government's "fair dividend rate" tax plan for equity investments outside Australasia.
* For individuals with more than $50,000 invested overseas, all dividends and capital gains of up to a cap of 5% of the opening value of their portfolio will be taxed, but no tax will be paid on an overall loss.
* Managed funds will pay tax on 5% of the opening value of their overseas investment each year even if they have an overall loss.
* Critics say the weighted average dividend yield in world markets is about 2.2%.
* The select committee has retained the bill's five-year exemption from the new tax rules for Guinness Peat Group shareholders.
