NZ's muddy tax laws scare off investors

By SIMON COLLINS

The Government's science advisers say New Zealand is missing out on venture capital because of tax rules that are out of line with world trends.

In post-election briefing papers, the Ministry of Research, Science and Technology says overseas investors are "wary of unfamiliar legal structures and tax treatment of venture capital entities".

"This is limiting their willingness to invest here, compared to our competitors, including Australia."

Science Minister Pete Hodgson said the rules were creating uncertainty and the law needed to be clear.

"It is under review," he said.

The ministry, which manages the Government's $100 million investment in the new Venture Investment Fund, says the United States "looks through" a venture fund to tax investors on the basis of their individual tax status.

But in New Zealand, the venture fund itself is taxed.

"We have a model that is at odds with what is becoming a world standard based on what happens in the US, which is the largest venture capital market," said the ministry's chief executive, Dr James Buwalda.

"In the US, the standard model is a limited partner/general partner arrangement. The general partner is the fund manager, the limited partners are the investors.

"That limits the liability of the investors because the general partner carries all that liability, but on the other hand the general partner has no resources to cover that liability."

He said investors preferred this structure because many US investors were tax-free pension funds and endowments.

Hodgson said the Government was reviewing the issue in the context of a broader review of international tax rules.

"I do know that there is uncertainty about a person putting money into a closed-end fund, knowing that when they exit with a capital gain, that that capital gain will be tax-free," he said.

"The question is whether we can give venture capital companies certainty ahead of time that it will not be taxed."

Ministry of Research, Science & Technology