Unit trust tax figure 'grossly overstated'

By Rob Hosking

Friday 25th June 2004

The government expects to reap a minimum of $25-35 million a year from its tax clamp-down on investments Australian unit trusts a figure rubbished as grossly overstated by researcher Fundsource.

And Fundsource should know because it was the company that supplied Inland Revenue with the figures from which the $25 million-plus figure was derived.

Australian unit trusts (AUTs) are the focus of a special amendment to a tax bill going through Parliament after officials advised there is "massive" tax leakage through New Zealanders investing in those trusts.

The government has been loath to put any figures on the extent of the leakage, although both Revenue Minister Michael Cullen and IRD officials have publicly stated that the leakage is large.

One Treasury memo on the issue warned last year that New Zealand-based fund managers were running all their investments through AUTs and that, if unchecked, the gap "could result in us having no income base."

That estimate appears to have been scaled down somewhat, and in a joint Treasury/ IRD paper that went to the cabinet in April, the figure was put at between $25-35 million.

Officials warned as they usually do with such estimates that the figure is conservative, and also that the estimate assumes about half the money invested in AUTs about $3 billion is then reinvested in vehicles that also reduce New Zealand and Australian tax, such as UK investment trusts.

That last comment shows officials do not understand the issue at all, according to Fundsource executive chairman, David van Schaardenburg.

"None of them are reinvested in the UK investment trusts. They all go into global equities like GE or Intel or whatever.

"There just isn't any subsequent tax manipulation going on. If they believe that, they are completely off the mark."

And he does not believe the tax "leakage" from AUTs is anything like the $25-35 million suggested by Treasury and IRD officials.

"Move the decimal point one point to the left and you'd have a more accurate figure."

After all, Fundsource supplied the IRD with the research from which it based their calculations on how much tax leakage there might be.

The proposed plugging of the tax gap has been criticised by the financial services industry, which says it goes further than is necessary and will catch a lot of investments that are not "tax aggressive."

It also takes issue with the characterisation of the tax anomaly, by officials and ministers, as a "loophole."

Investment Savings and Insurance Association chief executive Vance Arkinstall has pointed out that the industry itself brought the anomaly to officials' attention some years ago, but there was little interest.

Investment in AUTs is not new it has been going on for about 15 years, van Schaardenburg said.

The tax anomaly lies in two "gaps" in Australian and New Zealand tax law, which, when put together, allow New Zealand investors to avoid paying tax.

This is achieved when, rather than investors taking dividends, they opt to have the earnings distributed by way of a bonus issue of new units, and reinvesting those units.

"The amounts which vest absolutely in the beneficiary are economically equivalent to a dividend and should, therefore be treated equally," tax officials argued in a cabinet paper.

That argument is the basis of the law change before Parliament.

The anomaly is compounded because Australian tax rules state that if a unit trust earns income from outside Australia, and a non-Australian investor is the beneficiary of that income, the income is not taxed in Australia.

The example that has been given and which appears to have added insult to injury for the New Zealand government is that a New Zealander can invest in an Australian unit trust, which then invests in New Zealand government stock, and the return is not taxed in either jurisdiction. It is estimated that, of the $3 billion of New Zealand money invested in AUTs, about $150 million is put into New Zealand government stock.

One Treasury memo warned that New Zealand-based fund managers were running all their investments through AUTs and that the gap 'could result in us having no income base'

Comments from our readers

No comments yet