Mary Holm: No safe haven on Aussie shores

I was alarmed to read in your column last weekend that the $50,000 exemption won't apply to my WiNZ holding, which I purchased with the tax exemption ruling in mind. (WiNZ is an international index share fund.)

Having bought some of my holding in December 2001 at $1.75 each, could I be in the situation of having to pay a capital gains tax when I'm still in a capital loss situation, and only really recovering back to my original acquisition cost?

This could result if the starting valuation is set as the price at April 1, 2007 (when the proposed tax changes take effect), if it is less than my cost. I have no other overseas holdings.

Also, having read an accountants' bulletin stating "that where the Australian company has shares in companies in other countries no 'trace through' will be required", could WiNZ do its investors a favour by changing from a New Zealand share fund to an Australian listed company?

Under the proposed tax changes, investors in New Zealand-run managed funds with shareholdings beyond Australia - such as WiNZ and other group investment funds, unit trusts, super schemes and the like - won't have to keep track of prices when they bought and sold and so on.

Things will seem pretty much the same as now, with your being taxed on your dividends but not your capital gain, says David Carrigan of Inland Revenue. You are, after all, investing in a New Zealand entity.

Within the funds, though, the managers will deal with the changes. And institutions such as WiNZ will take the market value of their fund on April 1 next year as the starting date from which they will calculate capital gains and losses.

Under the changes, WiNZ will be worse off because it will lose its capital gains tax exemption. This will be reflected in its unit prices. So, everything else being equal, you won't get quite such high returns from your investment - although I still think it will be a good investment.

What if WiNZ moved to Australia, as you suggest?

"As WiNZ is a group investment fund for tax purposes, it would be difficult to restructure it as an Australian resident listed entity," says Carrigan.

And if it were restructured, it's likely that any income or capital gains the fund earned would be distributed to you and taxed in New Zealand as a dividend, he says. The dividends wouldn't be imputed, so you would pay full tax on them at your personal tax rate.

All in all, it doesn't sound like such a good idea. But nice try!

A note for readers who have direct investments beyond Australia that cost you more than $50,000: When you are calculating your capital gains you will be able to start from either the value of your investments when you bought them, or their value next April 1, whichever is higher, says Carrigan. And the higher the starting value, the lower your gain will be. This applies to "natural persons", not trusts.

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We (my wife and I) are certainly going to be affected by the new overseas capital gains tax. It is interesting that the fund managers are getting such a great deal, yet the individual is getting a worse tax situation.

Generalising as you have done on dividend policy is not a particularly good way to sum up justifying a levelling playing field. Direct share investing leaves what companies and what dividend policies to choose up to the investor, ie, in the past I have invested in Lloyds TSB which pays an 8 per cent dividend yield, while Burns Philp in Australia paid no dividend.

Another point on Australian shares is the franking credits situation. It is no good to have an Australian share that issues a fully franked dividend only to have that credit completely ignored by our IRD. The tax credits on the UK and US dividends are indeed allowed as tax credits in New Zealand.

I haven't read too much detail on the tax changes, although it will be enough to change our investing behaviour. I wonder how provisional tax will work - and God forbid, penalties and interest if you get it wrong, all on unrealised gains. I hope that is covered off somewhere.

Actually, I hope the politicians realise that there are a number of people out here like the person that wrote in two weeks ago and I - hard working, wanting to get ahead and feeling fairly upset about their voting behaviour.

Let's take this one step at a time:

* Are fund managers benefiting more than individual investors?

The changes to funds help investors in those funds more than the fund managers, who will have to do more administration.

Admittedly, though, if funds become more attractive that will help fund managers' business. So have funds got a better deal?

Some of the major changes for funds - removing tax on capital gains on Australasian shares and enabling taxpayers in the 19.5 per cent bracket to be taxed at their own rate - are really just putting fund investors on an equal footing with individual investors.

True, many individuals who trade frequently will continue to pay tax on their gains while funds that trade Australasian shares frequently won't. And taxpayers in the 39 per cent bracket will pay only 33 per cent tax if they are in a fund but 39 per cent if they invest directly - although many invest directly via a trust so they also pay only 33 per cent.

On the other hand, as I said above, individuals will get a choice of starting date for calculating their capital gains while funds won't. And individuals have to invest more than $50,000 in international shares before the gains tax applies, while fund investors have no such minimum - because fund managers will do the calculations for them.

"The point of the project was for people who invest in managed funds to be in roughly the same position as direct investors," says Carrigan. And given that direct investors are taxed in a variety of ways, it seems the officials do have it roughly right.

* On dividend policy, you will certainly find exceptions to the rule that Australasian shares pay higher dividends than in other countries.

But the alternative might well be classifying every company as high-dividend or low-dividend - and having to change that as each company's policy changes. No thanks.

* You seem to be confusing franking with credits for resident withholding tax.

Australia's franking credits are like our imputation credits, which are given for tax paid by the company rather than the shareholder. While New Zealand would like to set up a reciprocal agreement, under which we would recognise Aussie franking credits and they would recognise our imputation credits, that hasn't happened yet - except in unusual circumstances.

On the other hand, if a company in any country, including Australia, withholds tax when it pays you a dividend, Inland Revenue gives you credit for that tax paid.

It's true that Australia is less likely to withhold tax on dividends than, say, the US or UK. But that doesn't mean you are better off, taxwise, with US or UK shares than Australian shares.

You get the credit on the US and UK shares only because you have paid tax. If you don't pay tax on Australian shares and don't get credit for it, you are just as well off.

* Your point about provisional tax could well be a good one. I gather from your letter that you have direct share investments beyond Australia of more than $50,000, and so you will be caught in the gains tax maze.

Keep in mind, though, that each year you won't have to pay tax on a return of more than 5 per cent. So hopefully things won't get too horrific - in terms of money owed or complexity - until you get out of your investment. At that point, I'm sure you'll need the help of an accountant.

Here's hoping the Government makes compliance as easy as possible.

Remember, if it all gets too hard, you can always move your offshore investments into a managed fund and let the fund managers do the dirty work for you. It's a great way to get wide diversification.

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There is one simple rule of money: "Money will go where it is best treated."

This new law is nothing more then capital controls and a tax on a kiwi dollar that will fall for five more years.

Personally I know many investors are now considering leaving the country and taking their money with them. Unrealised gains = unrealised immigration.

Perhaps this is the goal of the Government. If this is the case, then the politicians are more brilliant then I give them credit for.

Well that's one spleen vented.

The tax changes don't feel that extreme to me, but to each his/her own. By the way, I'm not sure where you get the idea that the dollar will fall for five years. Most economists feel nervous about forecasting dollar movements over much shorter periods. But who knows? You might be right.