COMPROMISE ANNOUNCED ON OFFSHORE INVESTMENT RULES

After mounting criticism, Finance Minister Michael Cullen and Revenue Minister Peter Dunne have unveiled a tax compromise on the proposed offshore investment tax changes. The new rules try to put all those investing outside New Zealand on an even footing.

The proposed changes are as follows:

• Individual investors will be taxed on a maximum of 5% of the value of their offshore shares in each year. They will be taxed at a lower rate if they can show their return (dividend income and capital gain) is less than 5%;
• Managed funds will be taxed at a flat rate of 5%. We understand companies and trusts will also be subject to the 5% flat tax rate, but this is to be confirmed;
• There will be no requirement to carry forward any excess gain to future years if the return is greater than 5% in any given year.

The new proposals are similar to the 'risk-free rate of return' proposals in the 2001 McLeod Report. They may still tax capital gains and tax may still be payable under these proposals even where a taxpayer has not received any dividends. Thus, similar to the original proposals, there may be adverse cash flow implications for investors. Nonetheless, we believe that these new proposals are a significant improvement on the previous overly complex proposals.

It appears that the Australian listed share exemption and the GPG exemption will remain unaffected, but this is also to be confirmed.

We certainly do not expect this to be the final word on these contentious offshore investment rules.

Other changes in international tax rules

The Revenue Minister announced last month that a government discussion document will be released before the end of the year to consider changes to more of the rules for international investment. The main focus will be on the taxation of outbound, non-portfolio investment, including a review of the current structure of the controlled foreign company (CFC) rules.

Other areas to be considered are:

• The conduit and thin capitalisation rules;
• The imposition of NRWT rates on dividends, interest and royalties under the current tax treaties; and
• The merits of introducing an active-passive distinction between different types of income.

Partnership tax changes

New legislation is planned for introduction next year which codifies the tax rules for general partnerships, and brings in new tax rules on limited liability partnerships. The discussion document issued in June 2006 indicated that the LAQC rules would also be reconsidered with the introduction of limited partnerships, and that there may no longer be a need to have LAQC's. However, the government have now indicated that any changes in the taxation of LAQC's will not be considered until after the changes in the partnership legislation has been enacted in its final form.

If you require further information, please contact your tax advisor or Maree Kempthorne (Tax Director)

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