Capital gains tax to hit investors

Some foreign investors will get hit by a capital gains tax - something New Zealand is not supposed to have - when they pull their money out of the country, under new rules announced by the Government without consultation.

Finance Minister Michael Cullen said on Monday companies that migrated (that is, move their incorporation and head office offshore) would be treated as if they had been liquidated. They will be deemed to have disposed of all their assets and liabilities at market value and paid out the proceeds to shareholders as a dividend.

But tax accountants say the planned law change merely extends an anomalous feature of the tax treatment of liquidations to a whole new set of transactions.

Deloitte tax partner Thomas Pippos said that when the shareholders were foreign companies owning at least 20 per cent of the migrating New Zealand companies they could get hit by a non-resident withholding tax of 15 to 33 per cent. In effect, it would be a capital gains tax.

He said that was unfair when other kinds of shareholders - people or trusts - escaped the tax.

The tax would not apply if the New Zealand operation was a branch rather than a separate company, or if the offshore shareholder sold the New Zealand company instead of the underlying assets or business.

In the search for a comprehensive rule for the tax treatment of migrating companies, the policymakers were merely extending an anomalous, hard-to-justify rule from liquidations to a new set of transactions.

"The rules are a trap for the unwary or those unfortunate enough not to be able to avoid them. They are not a pillar of our taxation system to be protected at all costs," Pippos said.

He also objects to the fact that the law change once enacted would apply from last Monday. Such "legislation by press release" was justified only in exceptional circumstances.

"This migration issue hasn't just cropped up. It has been around since 1993 when the Companies Act came in. You would have thought there would be some discussions before the sledgehammer came down."

KPMG tax partner John Cantin said the change would impose a capital gains tax where there was none before.

"When people are looking to invest in New Zealand one of the headline things that attracts them is that we don't have a capital gains tax," he said. The Government had sprung the change on taxpayers.

"There will be companies caught by this which are in the middle of such transactions, just in the ordinary course of business."

Cantin said it was disappointing that New Zealand was imposing higher taxes on non-resident taxpayers in these circumstances, when the general trend for many years had been to reduce the tax costs on non-residents investing into New Zealand, on the grounds that the economic cost of that tax ended up being borne by New Zealanders anyway.