Income stock exodus unlikely

By GEOFF SENESCALL

Brokers do not expect a big exodus from dividend stocks as a result of the tax increase for high-income earners.

The prospect arises because corporate tax remains at 33 per cent, while the marginal tax rate for people earning over $60,000 a year will be 39 per cent. This means even if a company pays a fully-imputed dividend, such shareholders will face a further 6 per cent top-up tax.

Head of research at Credit Suisse First Boston, Rob Bode, says this will only affect a relatively small number of people, but those with large amounts to invest will have an incentive to try and avoid the additional tax.

They could either set up a trust if they already haven't, or an investment company, which has to pay only 33c in the dollar.

"My feeling is you will not necessarily see dividend stocks come out of favour."

He said New Zealand companies paid out a large amount of their earnings in dividends, a good proportion of which were imputed. This was symptomatic of a market that did not have a lot of growth, so companies did not have to retain a lot of earnings.

He doubted that corporates would switch their distribution policies to accommodate locals, as individuals made up only around 14 per cent of the market.

Bruce Sheppard, of chartered accountants Gilligan Sheppard, said a trust was one vehicle those earning over $60,000 could look at. But they would have to allocate the income to other family members not in the higher earnings bracket.

If a trust chose to retain income, then they would be taxed at 39 per cent as well, he said.

Income-splitting would also become more prevalent. "A hubby-wife team alone will give you $120,000 a year of income before the higher rates come in."

Rodney Dickens, head of research for ABN Amro, did not expect there to be a big effect for the retirement group.

The average savings of a high net worth client was around $300,000, he said. Basically someone would need savings of $1 million earning a 6 per cent return to trigger the higher marginal tax rate.

"For those in that bracket, most of whom have worked hard to get there and paid a lot of tax in doing so, the effect was real," he said.

Some might look to swap out of dividend stock, but the fear was that they would move into more risky investments.

Those who have more fixed interest portfolio's might go out of high credit rated corporates into lower credit rated ones, in the hunt for higher yields to offset the tax increase.