Venture capital tax change a 'priority'

By BRIAN FALLOW

Changes to the tax rules on inbound venture capital will be a priority this year, says Finance Minister Michael Cullen.

"This will ensure that New Zealand does not lag behind similar Australian initiatives in this area," he said in the Budget speech.

Cullen did not elaborate, but this year he said officials would look at tax issues identified by the taskforces set up to further the growth and innovation strategy.

One issue raised was American venture capitalists' preference for limited partnership structures under which the tax authorities look through a venture fund to tax investors on the basis of their own tax status. Tax-privileged investors such as pension funds or university endowments prefer such structures to the New Zealand one where the venture fund itself is a taxable entity.

Cullen said this week that the Government would also consider measures to provide a temporary exemption for migrants from tax on foreign incomes.

At present the cost of that tax ends up being met by the New Zealand businesses that require the skills of those migrants, he said.

The next tax bill would include base maintenance measures "to counter the ingenuity of those who will go to great lengths to avoid tax".

One of these measures is aimed at so-called mass-marketed schemes on offer to wealthy investors. These offer a return from tax deductions "to the extent that the investors need not be concerned with the underlying economics of the arrangement".

But Cullen also has larger targets in his sights, talking of changing the law, if necessary, to ensure that the high profits of large companies and the financial sector are matched by tax payments.

He said on Wednesday that the Government was taking "just a preliminary look at this stage" at arrangements by the two major newspaper groups to sell their mastheads (brands) and lease them back, claiming a full tax deduction for the lease/licence payments.

"Obviously there is a potential large hole here in the system which we are probably going to have to have remedial legislation for."

The next tax bill will also implement proposals, under discussion for two years, to subject some imported services to GST.

Under current law, imported goods, but not services, are subject to GST.

The exception for imported services is an incentive for businesses to import services - software upgrades, for example - rather than acquiring them locally.

To get around the obvious problem that overseas suppliers are not registered with the IRD for GST purposes, its preferred option was a reverse charge on business-to-business transactions, under which the importer of the service pays GST but can claim it back if it makes taxable supplies.

That lets out most businesses apart from banks, so the changes have been delayed until they can coincide with changes to the GST rules for banks allowing them to zero-rate the services they supply to GST-registered businesses.