Foreign tax grab called 'vindictive'

A former managing director of supermarket giant Foodstuffs says the Government's plan to impose a tougher tax regime on overseas investment is a vindictive tax grab, which ignores New Zealand's very limited investment options.

Retired Aucklander Hugh Perrett said yesterday that the proposal was a thinly disguised capital gains tax, justified by "contrived, specious and fallacious" arguments.
The Government plans to introduce a gains tax on investments in seven traditionally exempt countries, including Australia.

It will apply to individual investors and "passive" index-tracking funds that own less than 10 per cent of a foreign company. At present if the company is resident in Australia, Canada, Germany, Japan, Norway, Britain or the United States, investors pay tax in New Zealand only on the dividends they receive.

The proposal offers a minimum threshold. Individuals will need to have more than $50,000 invested in total in such companies.

Perrett said he and his wife had accepted responsibility for generating their own retirement income by investing in a portfolio of top-quality, strongly managed, top-performing industries across a sensible geographic spread.

They had done so to protect the value of their assets against differing economic cycles and exchange rate movements, and to access industry sectors denied to them by New Zealand companies listed in New Zealand.

These included the finance sector, pharmaceuticals, household consumables, vehicle assembly and manufacturers, media, mining and electronics.

In a letter to Prime Minister Helen Clark, Perrett said the planned regime ignored these issues completely. It seemed to be centred only on gathering extra tax, while forcing capital legitimately and prudently invested offshore, back to New Zealand.

It was a tax philosophy that would penalise offshore portfolio investment harshly and redirect investment into a much weaker, severely limited, and higher-risk market.

"People like us who are retired and solely dependent on our investment income to live our lives should be entitled to invest our capital where we see it as having the greatest security.

"The cash flow implications effectively preclude offshore portfolio investment.

"I strongly resent such draconian policy and the Government dictating that I should be faced with investing my hard-earned capital in second, third or fourth-rate investments simply because they are New Zealand domiciled companies."

Perrett has calculated, using the formula prescribed in the Government's proposal, that the tax over three years on a portfolio of foreign shares with an original market value of $4.4 million would total $577,533.

This calculation assumed an annual increase in the value of the portfolio of 15 per cent, made up of 7.5 per cent in annual price growth in the currency of the country of origin, and an additional 7.5 per cent with the exchange rate moving against the kiwi dollar.

His calculations on dividends received after tax show an annual income reduction of 56.6 per cent.

Perrett said the proposals as they affected investment in Australia were "particularly abhorrent", given CER and the Government's stated intention to be a single economic unit.

It was frustrating enough that so many New Zealand listed companies were taken over by Australian companies, or shifted across the Tasman as a result of CER.

Public submissions on the proposed regime close in September.