New Overseas Tax Rules - Worked sample problem

[Tim]

What a complicated tax system this will become, I wonder how much they will get?? Cant we have something simple!!!

[patsy]

A couple of points to clarify:

1) Although the "capital guaranteed" OM-IP funds can be regarded as providing a performance guarantee (i.e., the performance overall will no be negative), the "guaranteed performance" that the legislation refers to applies to the OM-IP that have a 40% minimum performance guarantee over the life of the fund. The rest of the OM-IP will fall within FDR.

2) I believe the OM-IP funds that fall within the FDR are taxed according to the FDR because they are domiciled in the Cook Islands, not because they are hedge funds. It is because, previously, they were caught by the FIF rules.

3) There are a few components of the All Ord and/or ASX500 that are not "companies" as such - e.g., listed funds. A "company" from the perspective of the FDR rules is defined as an entity maintaining a franking account open throughout the tax year. I don;t know if any REIT is part of the ASX500 but if it were, then they'd be FDR caught.

4) Snoopy - the "anything can happen" to Lion Tamer (refer to my previous post), means that they may be whacked with something even worse than the FDR. If you check their web site, you'll see that they report their unit price under a concept called "hold to maturity" price. Without getting into an explanation of what this means, the outcome of their way of valuing units is such that you cannot determine a value as of 01/04/07. To make it worse, some of their funds are linked to fixed interest securities overseas yet even those funds may be caught as well (because the fund does not invest in fixed interest but on options linked to fixed interest rates).

[patsy]

quote:Originally posted by Snoopy


It looks like most Australian trusts will be caught because they have to 'apply' to NZ IRD for an exemption. I can't see any of them bothering to do that.

I am still awaiting a response from Platinum. Given that they advertise heavily in NZ and target NZ investors quite strongly, I suspect that they'd like PIE status (perhaps, I'm just hoping that it'll be the case)

[Snoopy]

quote:Originally posted by patsy


3) There are a few components of the All Ord and/or ASX500 that are not "companies" as such - e.g., listed funds. A "company" from the perspective of the FDR rules is defined as an entity maintaining a franking account open throughout the tax year. I don;t know if any REIT is part of the ASX500 but if it were, then they'd be FDR caught.

Ok I know I am going to show my ignorance here, but:

If an entity like Kiwi Income Property Trust can pass imputation credits through to NZ unitholders....

Why cannot an Australian REIT pass franking credits through to Australian unitholders?

SNOOPY

[OldRider]

Westfield dividend comes from three sources - two trusts and one company, no franking credits from the trusts and tax deducted, franking credits and no tax from the company - 60% franked.

My presumption is that with these stapled securities, distributions from the trust component is a tax deductable cost, so the trusts show no profit, thus have no tax and can have no franking credits.

What will happen here?, perhaps the next step is to only allow companies with 100% franked dividends.

[thereslifeafter87]

quote:Originally posted by Snoopy

quote:Originally posted by patsy


3) There are a few components of the All Ord and/or ASX500 that are not "companies" as such - e.g., listed funds. A "company" from the perspective of the FDR rules is defined as an entity maintaining a franking account open throughout the tax year. I don;t know if any REIT is part of the ASX500 but if it were, then they'd be FDR caught.

Ok I know I am going to show my ignorance here, but:

If an entity like Kiwi Income Property Trust can pass imputation credits through to NZ unitholders....

Why cannot an Australian REIT pass franking credits through to Australian unitholders?

SNOOPY

Because unit trusts are taxed on a flow-through basis in Australia - much the same as a partnership is taxed here.

[thereslifeafter87]

The alternative to all this fair dividend rate hoopla is to use the accounting profits method to pay tax under the Foreign Investment Funds rules.

The simplest way to do it is to pay tax based on your holdings at 31 March.

The calculation is simple - multiply your interest in the capital of the company by the net after tax profits of the company, then you get your taxable income.

If you were a trader before because the FIF regime didn't apply, and you are now caught by the removal of the grey list, you are no longer a trader. You are deemed to have no income or expense related to the shares you hold other than those calculated under the calculation method you choose (ie: Accounting profits or Fair Dividend).

With accounting profits there is also no quick sale adjustment as under the fair div regime. The quick sale adjustment deems all your capital gains from the trade to be taxable income.

For those of you thinking about selling all your holdings on 30 March and buying them back on 1 April, there are anti-avoidance provisions in place to prevent that.

Accounting profits will generally get you a better result than fair dividend rate where companies you invest in have a PE greater than 20 or make losses.

You can offset any accounting profits losses against other fif income from the same country, but you are limited to the extent of your economic loss.

EG: The company announces a $1mill loss. Your share of that is $20k, but the market value of your holding only declines by $10k - you only get to claim the $10k loss.

Any questions?

[thereslifeafter87]

On second consideration it appears more complicated than I originally thought. If you use accounting profits method you are still taxed on any gains from the sale of shares held on revenue account.

[Tinker]

May I suggest being taxed at your marginal rate on dividends you receive. Seems simple to administer and fair to me. Would also ensure investors were not discouraged from taking risks to grow the productive private sector.

Just a thought.

Cheers
Tinker

[thereslifeafter87]

quote:Originally posted by Tinker

May I suggest being taxed at your marginal rate on dividends you receive. Seems simple to administer and fair to me. Would also ensure investors were not discouraged from taking risks to grow the productive private sector.

Just a thought.

Cheers
Tinker

The IRD's argument was that companies overseas often pay low dividends. Whether this is true or not is beside the point - they needed the extra revenue in the bank to fund kiwisaver.