Mary Holm: Overseas seems like capital idea

Despite reading everything I can find about the changes to the way overseas investments are going to be taxed from April 1 next year, I'm still having trouble getting to grips with exactly what does and doesn't qualify for the $50,000 exemption for individual direct investors.

Can you ask your IRD contacts whether they intend to publish a list of exactly what qualifies as a "direct investment"?

We have directly invested into a number of overseas-based index funds and UK-based investment trusts. None of these has any holdings in New Zealand, but one or two do in Australia. Between my partner and me they amount to less than $100,000 cost.

I understand that if we had bought shares directly into single overseas companies that these investments would qualify for the exemption, but because we chose to spread the risk and purchase into investments that hold shares across a range of companies (sometimes across a range of countries), I hope we are not going to get hammered with this new capital gains tax. I think we would sell and invest directly into companies if we have to give so much away to our friend the tax man.

Also, is there an opportunity to put further submissions to the Government on this proposed new tax as it stands before it finally becomes law?

You are among the lucky ones. Investments in managed funds based offshore, such as the ones you have invested in, will be treated like direct investments in offshore companies, says David Carrigan of Inland Revenue.

So, provided your investments cost less than $50,000 per person, you will be exempt from the proposed tax on capital gains.

Perhaps others who have invested less than $50,000 in a New Zealand-based international share fund might want to bail out and invest, instead, in a similar overseas-based fund.

The only trouble is that makes life more complicated in terms of taxes, the handling of your estate after you die and so on. I suggest everyone waits until the changes have been finalised before making such a move.

For more information on the proposed changes, go to www.taxpolicy.ird.govt.nz. I hope this is also helpful to the many others who are sending me questions, as there are too many letters to publish them all.

On submissions, nobody is calling for them right now. But the bill is expected to be introduced to Parliament on Tuesday.

Soon after its introduction, there will be a copy of the bill and commentary on the tax policy website. The select committee is then expected to call for submissions, probably by the end of May, says Michael Cullen's office. I will run information in this column on how to make a submission.

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The new capital gains tax is also a tax on inflation as there appears to be no indexation to account for that.

I would also like to know how overseas share sales and repurchase might work in order to avoid triggering a tax liability?

How long will I have to re-purchase - five minutes, five days? And as for our family trust - well no one seems to address that issue.

You're quite right about inflation. To be fair, any tax on capital gains should include adjustment for inflation. You might want to make a submission about that.

On the sale and repurchase of shares, you have to do it within the same tax year. So you will have anything from 365 days to one minute!

Family trusts? The only difference between the way trusts and individuals will be taxed is that trusts won't qualify for the under-$50,000 exemption, says Carrigan. This is because, otherwise, someone with $1 million invested offshore could just put it into more than 20 trusts.

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The local fund managers are gleeful. The proposed tax changes will distort investment and discourage diversification. Winners will be Australian shares and rental property and Kiwis will end up over-weight our local tiny stock market and residential property. They will assume even greater risk.

Part of the tax will not be payable until investments are sold and returned to New Zealand. Why would they be returned?

You have been taken in by this, stating in last week's column that "you can always move your offshore investments into a managed fund". No Mary, I don't want to pay the high management fees. and I don't believe they are the best managers around either.

Your two favourite recommendations over the years have been global index funds and British investment trusts. Both will be clobbered by the new tax. You are, disappointingly, remarkably quiet about this.

PS I enjoy your column and am pleased we are off the rental property versus shares issue for a while. You have the chance to rage against a new and unnecessary tax being brought in by a minister convinced that he knows how best to spend our hard-earned money. Don't miss your opportunity.

With respect, the way you have answered letters on this issue makes me wonder if the seminars you present and the books you write are sponsored in any way by the local fund management industry. Are you a truly independent columnist?

PPS Why not make my day and publish the PS as well!

You're not the only one challenging my integrity. Some other comments from readers:

* "I've been a bit surprised to find that over the past few weeks you have changed your column from offering generally excellent financial advice to being an apologist for the Government's proposed tax changes."

* "You must be on the Australian fund managers payroll. The tax changes only benefit fund managers and disadvantage individuals who do their own thing."

* "Your article sounds remarkably like a press release from Dr Cullen's office."

Ouch! It's not exactly the sort of thing an independent writer likes to read. I'm comforted, though, that the four of you seem to disagree about whether the Government, local fund managers or Aussie fund managers are my masters - given that they all have widely differing agendas.

Of course I'm not on any of their payrolls.

I've often criticised Cullen policies. But, in working on answers to readers' questions, I've had several long conversations with Carrigan and with Brock Jera of the Treasury, both of whom worked on the proposals.

When I raised concerns about the changes, they frequently came up with sound reasoning for what they have proposed. I make no apology for passing on that information to readers.

Fund managers have copped plenty from me at times, too, largely for charging too high fees. But I've always said that low-fee managed funds are a good way for investors to spread their money, especially those with smaller savings. So, again, no apologies for applauding the changes that help such savers.

That's not to say that I don't care about direct share investors too. But fund investors and direct investors are being treated roughly equally in the changes, with each having some advantages.

What about global index funds, which you rightly say are a favourite of mine? I've explained several times that their returns will be lower. And given the amount of money I have invested in them, I'm unhappy about that.

Note, though, that the proposed changes will move those funds from their current tax-favoured position to a more or less tax-neutral position.

Maybe that shouldn't happen. As I pointed out in one column, many New Zealanders favour property investment or local shares, greatly reducing their diversification. "I reckon we need more tax preference for international share investment, rather than less," I added.

Still, I find it difficult to come out swinging too hard against moves towards tax neutrality.

Beyond that, my coverage has been far from totally favourable. A few quotes from the last few columns, edited down for space reasons:

* Explaining how the 5 per cent cap works is a bit of a nightmare.

* I'm worried that lumping Australian shares in with ours will exacerbate a tendency among New Zealanders to put most or all of their offshore investment dollars in Australia. That's bad for diversification.

* The proposed tax will apply partly to "unrealised" gains - gains that haven't yet been turned into cash by selling the shares. There may be times when some people will be forced to sell some of their shares to pay the tax. That hardly encourages long-term investment.

* The enforcement of the laws on depreciation and capital gains on property seem to be too lax. If we want fair tax treatment of all investments, politicians should push for tougher enforcement.

* All in all, I think the status quo is better.

Dr Cullen certainly didn't approve those comments - some of which, by the way, reflect your views.

A number of other readers have also raised valid criticisms of the proposed tax changes. I hope to run more of them next week - while being mindful that not everyone wants the topic to monopolise this column for too much longer.

I do hope I've made your day.

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Nice to know someone who writes in newspapers can get it right.

What a lovely message. I have to confess, though, that I did get one detail wrong in the second Q&A last week.

I referred to withholding taxes on dividends in "say, the US or the UK". Inland Revenue now tells me that, in effect, New Zealanders don't pay withholding tax on dividends from the UK.

This doesn't affect the thrust of last week's discussion. It's just that my example was an inaccurate one. Sorry.