Offshore Onshore Mag

Following criticism from tax and finance industry experts, New Zealand Finance Minister Michael Cullen and Revenue Minister Peter Dunne have unveiled a proposed way forward on offshore investment tax changes.
Commenting on the changes, which are part of the tax bill now before the Finance and Expenditure Select Committee, the ministers said on Friday that they are proposing to apply a 'fair dividend rate' to calculate tax on overseas shares.

"This would tax individuals on a maximum of 5% of the value of their offshore shares in a given year. However, unlike the proposal in the bill, where their shares have made a return in excess of 5%, there would be no amount to carry forward as an excess gain (to be taxed in a later year). The fair dividend rate approach would not target capital gains, but rather something approximating a reasonable dividend yield," the ministers explained.

They continued:

"Individual investors would be able to pay tax on a fair rate lower than 5% if they can show that their offshore portfolio share investments made a return of less than 5%. Where an individual investor’s shares make a negative return, no tax would be payable."

"Any dividends derived would be counted for the purposes of calculating the investor’s overall return. However, the maximum amount taxable in a year would be limited to 5% of the opening value of an investor’s shares (including situations where a dividend in excess of 5% has been derived)."

"Our intention all along has been to ensure greater fairness in the taxing of overseas investment income. The current rules create unfair tax advantages for direct investors over other savers, such as ordinary lower and middle-income people, who use managed funds that are taxed on the funds' earnings."

"We want to eliminate the tax advantages some investors have enjoyed for many years. A number of offshore investment vehicles pay no or very low dividends so that their investors avoid paying tax. They should be paying their fair share of tax. That is only reasonable if all of us are to fairly share the cost of providing hospitals, schools, roads and other government services."

"The new rules try to put all those investing outside New Zealand and Australia – individuals and managed funds – on a similar footing. The tax changes we are suggesting preserve these aims."

The ministers stressed that the new proposals do not constitute a "tax grab" and that the government will be foregoing around NZ$140 million a year in revenue in an attempt to level the tax playing field.

"We believe this is a price worth paying to remove distortions in investment markets," the ministers stated.