Government considering controversial tax on investments

By IAN LLEWELLYN

The Government is looking at a controversial taxation regime for domestic savings, Finance Minister Michael Cullen said today.

Laying out his tax policy programme until the end of 2005, Dr Cullen said officials who had been looking at taxing international investments on the risk-free rate of return method were now looking to see if it could apply to domestic saving entities as well.

A Government official told NZPA the risk-free rate of return method took the opening value of an asset and applied a risk-free rate for that, which had been outlined in a discussion document as 4 per cent.

That gave investors their taxable income to which normal marginal tax rates were applied.

"So really what the risk-free rate of return is doing is it's calculating the amount of income to which normal tax rates are applied."

Dr Cullen hedged on whether he was keen on the approach saying it raised "very complex issues".

"Such an approach is worth exploring because it has the potential to provide improved consistency to the taxation of savings."

In his speech to the International Fiscal Association conference in Christchurch, Dr Cullen did not mention the political difficulties in explaining how people would react to paying taxes even when they had lost money on their investment.

Because the Government was now looking at implementing the risk-free rate of return domestically, it meant revamping the current "perverse" international investment regime would also be put on hold until after the 2005/2006 year.

In the meantime officials would be working to plug the Australian unit tax loophole as soon as "practicable".

"I am advised that a significant and growing amount of investment is now flowing into these structures, giving rise to a serious base maintenance concern," Dr Cullen said.

Legislation to give a tax holiday on overseas income to foreigners and expatriates who had been away ten years and were coming to New Zealand as employees is also to be postponed until later in the year.

Dr Cullen said the delay until the second tax bill was due to seeing whether the proposal could be extended beyond employees.

The Government would from April 1 give tax breaks to venture capital profits that some non-residents made in New Zealand.

Other areas highlighted in the work programme by Dr Cullen included:

* Setting up a work programme to design ways to increase work-based retirement savings;

* Negotiations with Australia on a double tax agreement, concluding the agreement with South Africa and giving effect to the agreements with Chile and the United Arab Emirates

* Studying what drives capital investment in New Zealand including a review of tax depreciation rules;

* Allowing deductibility for costs associated with patent and resource management consents and a wider review of other capital expenditure that can not currently be depreciated; and

* Streamlining fringe benefit taxation.

- NZPA