Investors face capital gains tax on Australian shareholdings

The Government plans to introduce a capital gains tax on investments in seven traditionally exempt countries, including Australia.

It will apply to New Zealand 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 the investors pay tax in New Zealand only on the dividends they receive.

Under changes outlined yesterday, that "grey list" of favoured countries will be abolished. Tax will apply not only to dividends but to any increase in the value of the investment each year - whether sold or not.

But there will be a minimum threshold. Individuals will need to have more that $50,000 invested in such companies in total.

While the tax regime for overseas investment will become harsher, changes proposed to investment in New Zealand companies through managed funds benefit taxpayers.

They will remove an anomaly which superannuation funds and similar investment vehicles have long complained about. If investors hold shares in a New Zealand company directly and sell them for a profit, that capital gain is not taxed.

But if a fund manager such as AMP invests its money in the same shares and makes the same profit, it has to pay capital gains tax. That disincentive to invest through managed funds will be abolished.

The new regime will also allow the income earned by a person's savings to be taxed at the same rate as his other income, not a one-size-fits-all 33c in the dollar as it is now.

At present, savers in the lower 19.5c tax bracket are overtaxed.

Deloittes tax partner Thomas Pippos believes the tax revenue the Government will lose through those taxpayer-friendly changes - about $100 million a year - will be more than offset by the tougher tax rules on overseas investment.

Despite Finance Minister Michael Cullen's declared desire to increase savings, Mr Pippos said, the new regime was likely to increase the taxes collected from savings.

The changes are likely to create a bias towards investing in New Zealand companies rather than foreign ones.