New Overseas Taxation Legislation

**OldRider** · 10-02-2007, 06:59 AM

Jesse:
You are correct in your view of the NZ tax treatment of Platinum units, the income which purchases the new units in lieu of the dividend, has been taxable for about two years, so that now there is no point in having the "E" type units.

When this occurred I transferred my Platinum investments to British based trusts - eg: RCP CLDN.

In all other ways I believe Snoopy is correct.

So in fact Platinum holders would have been better switching to British based for many years due to the CGT in Australia. I guess this might be why their return has averaged higher then Platinum.

At the moment I am not sure what to do as we are over the threshhold, probably will stay as at present and bite the tax bullet, it is always preferable to make the best investment decision regardless of tax.

**Steve** · 10-02-2007, 08:58 AM

Found this one under Mary Holm in todays herald...

I refer to the recent reply regarding the new overseas tax legislation from Inland Revenue, which stated that the Aussie exemption doesn't include companies that are not resident in Australia, even if they are listed on the Australian stock exchange.

As it may not be readily apparent that an Australian listed company is not an Australian resident, is Inland Revenue going to provide such a schedule on its website, which will ensure that taxpayers can comply with the new legislation.

For example BHP Billiton and Rio Tinto are dual listed in Australia and Britain, but are they resident in Australia? Also Rinker's main business is in the United States, but is it resident in Australia?

Inland Revenue is being unfair, if it leaves it up to the taxpayer to determine a company's residency.

Inland Revenue has no plans to publish such a list.

But, says Peter Frawley of the department, "If a person receives a dividend from a company listed on the Australian stock exchange that carries Australian franking credits (this would be stated on the shareholder dividend statement that the person receives from the company) then this should provide sufficient certainty that the company is resident in Australia."

He adds that "it has been a requirement for many years with the current Grey List exemption for a person to know whether the companies they invest in are resident in Grey List countries (Australia, United Kingdom, Germany, Norway, Spain, United States, Canada and Japan)".

I think Frawley is politely trying to tell you the new rules will be easier than the old ones, so what are you moaning about!

**patsy** · 11-02-2007, 10:57 AM

Snoopy

My comment regarding Platinum came directly from a tax seminar I attended just hours before I posted the message. I'm not suggesting that they were correct and you are wrong but let me explain their rationale:

(1) When assessing whether an investment vehicle (such as Platinum) is subject to the new legislation, we have to look at both the underlying investments (as you pointed out) and where the investment vehicle is taxed. If it is taxed in NZ or Australia, according to the seminar, then it does not fall within legislation. As you mentioned, Platinum is subject to Australian CGT therefore it shouldn't be caught by the new legislation. If this were incorrect, then every NZ-based unit trust that invests in overseas shares would be caught as well. This approach of looking at the tax status of the investment vehicle is similar to the approach that the IRD guy from Steve's post is saying (i.e., if a ASX listed company is paying franked dividends, then it is not caught).

(2) As you know, there are plenty of listed investment funds in Australia, for example HHV (Hunter Hall Global Value Fund). Would this be caught? Following you rationale, the answer is "yes". They invest in shares in the former Grey List. However, HHV is also subject to Australia CGT therefore, it shouldn't be caught by the NZ legislation.

(3) On the other extreme, we have WINZ, a NZ-based vehicle investing in overseas markets that is actually not paying any NZ tax because it is a passive fund - since it doesn't pay NZ tax, then it is caught.

(4) Another extreme example would be a US-based exchange traded fund that invests exclusively in Australian shares. The underlying investment is Australian companies but the vehicle pays CGT in the USA. Therefore, such an EFT would be caught by the new legislation on the basis of its tax status, not the underlying investment.

Again, I am not suggesting or supporting this interpretation of the legislation. I have just downloaded the entire report (500 pages or so) from the select committee and will read it in detail to confirm or deny this. However, the above examples are the conclusions I got from the tax seminar.

There are other cases, which affect me personally, that I would like to analyse. For example:

(1) the hedge funds OM funds from Man Investments are Cook Island registered. Their underlying investments are so complex that it is impossible to assess if the they are caught or not.

(2) LionTamer funds - some of them follow an index (e.g., the Japanese fund) but I think they don't invest in Japanese shares as such.

(3) The timing of investments is also something it is not completely clear to me. If I hold, say, $100,000 of an American stock as of 1 April 2007, then I'll pay tax according to the new legislation in the 2008 tax year. However, if I bought such stock on, say, 1 May 2007, then I wouldn't be paying any tax in the 2008 tax year but in the 2009 year (assuming I keep on holding such stock as at 1 April 2008).

**Snoopy** · 11-02-2007, 02:12 PM

quote:Originally posted by patsy

My comment regarding Platinum came directly from a tax seminar I attended just hours before I posted the message. I'm not suggesting that they were correct and you are wrong but let me explain their rationale:

Ok Patsy, thanks for the context. Was this seminar actually run by the IRD, or an independent consultancy firm?

quote:
(1) When assessing whether an investment vehicle (such as Platinum) is subject to the new legislation, we have to look at both the underlying investments (as you pointed out) and where the investment vehicle is taxed. If it is taxed in NZ or Australia, according to the seminar, then it does not fall within legislation. As you mentioned, Platinum is subject to Australian CGT therefore it shouldn't be caught by the new legislation. If this were incorrect, then every NZ-based unit trust that invests in overseas shares would be caught as well.

Patsy, what you say certainly seems to be fair and reasonable. But I would hesitate to suggest that all financial legislation is fair and reasonable, so I hope you will allow me to remain sceptical. The main problem I see with the new tax is the inability to claim losses when your share investment portfolio goes down. This will result in the same capital gain being defacto taxed more than once. It will also mean that losses that occur over a period of greater than a year incur a tax bill. In my eyes this is respectively double taxation, and legislating tax on a loss when no profit has been made. Both are highly inequitable, and I am surprised that AFAIK, I am the only person that has noticed!

As it stands at the moment every NZ based unit trust, with the sole exception of index funds, that invests overseas is subject to capital gains tax now. NZ unitholders never see this tax as it just comes off their unit price. Nevertheless the fact that the NZ unitholder doesn't 'see' the tax, does not mean it isn't there.

Under the new regime, NZ based unit trusts that invest overseas will no longer have to pay the existing capital gains tax. Instead they will pay the new 'deemed rate of return' tax. As before the fund will pay the tax internally. Unit holders do not have to worry about the new tax only because the NZ fund they are investing in will have already paid it for them.

To sum up I think your corollary reasoning that:

"every NZ-based unit trust that invests in overseas shares would be caught as well."

is correct. Every NZ based unit trust *is* caught, the only advantage to the unitholder being an administrative one. Namely that the trust will pay the tax for the individuals instead of the individuals paying the tax themselves.

quote:
This approach of looking at the tax status of the investment vehicle is similar to the approach that the IRD guy from Steve's post is saying (i.e., if a ASX listed company is paying franked dividends, then it is not caught).

Again this makes huge sense, but I will believe it when I see it.

quote:
(3) On the other extreme, we have WINZ, a NZ-based vehicle investing in overseas markets that is actually not paying any NZ tax because it is a passive fund - since it doesn't pay NZ tax, then it is caught.

I have no argument with your interpretation of what happens to

**Snoopy** · 11-02-2007, 02:28 PM

quote:Originally posted by OldRider

At the moment I am not sure what to do as we are over the threshhold, probably will stay as at present and bite the tax bullet, it is always preferable to make the best investment decision regardless of tax.

This is a sentiment I agree with Old Rider. Almost inevitably an investment that is sold as 'tax effective' is tax effective for one reason- it makes a loss!

The main reason I do not wish to pay *this* tax is that I belive the underlying reasoning behind it, that NZers are investing overseas and trading in markets that gives them a lower tax bill for the return received, is not true. Thus in using the new tax to 'level the playing field' (so called) the IRD are actually tilting the playing field in favour of Oz and NZ. Frankly, I intend to take advantage of this policy mistake.

SNOOPY

**patsy** · 11-02-2007, 05:06 PM

Snoopy

Thanks for your thoughtful response. The seminar was run by a Auckland-based tax lawyer, not by the IRD.

Incidentally, I have just read that Money Online are also running a seminar over the next few weeks in Auckland and Tauranga. Check with them if they are going to be in Christchurch as well (assuming you're still there!)

Your comment regarding an internal change of taxation of NZ-based unit trusts that invest overseas is what I had in mind (but didn't articulate that well!). NZ-based unit trusts will pay tax according to the new legislation instead of paying capital gains tax. The tax seminar I was referring to estimated that this change may possibly result in a decrease in total tax paid by the unit trust and this, consequently, in better performance.

I believe that the case of Platinum and other Australian based trusts still needs to be investigated. You may be aware that Platinum made a submission to the Select Committee in the initial round of consultation. The submission was available on their web site. I suspect that there was a reason for doing so, i.e., because it'd affect their unit holders.... but perhaps they just did it because Cullen's/Dunne's original proposal was load of ****, not because they felt affected themselves (I hope!).

My example of a US-based EFT investing in Australian shares is an illustration of the fact that there may be "something else" to consider other than *only* the underlying investment of the funds.

The select committee report is available at

http://www.parliament.nz/en-NZ/SC/Re...1cc2b727c3.htm

The case of hedge funds, like OM, is still debatable. You may recall some early discussions in another thread regarding whether commodity and bonds funds as well as future contracts would be caught. Hedge funds, because of their very own nature, are unlikely to invest in assets themselves but in a range of synthetics and derivatives. They (generally) do not own shares as such. This is what makes me wonder if they'd be caught.

**Ricky99** · 12-02-2007, 10:21 PM

Does anybody know if we can use LIFO for working out the relevant price to value our shares on. I've got 19000 AVM at $12 each, but the first 10k I got at 1.80 and others at various prices so would love to use the lowest initial prices rather than be forced to use an average price etc.

**Steve** · 13-02-2007, 07:09 AM

quote:Originally posted by Ricky99

Does anybody know if we can use LIFO for working out the relevant price to value our shares on. I've got 19000 AVM at $12 each, but the first 10k I got at 1.80 and others at various prices so would love to use the lowest initial prices rather than be forced to use an average price etc.

Generally, the IRD does not allow LIFO for tax purposes...