This article was published on 10 June 2006. Some information may be out of date.


  • All on government’s tax proposals.

QThanks for keeping the proposed tax changes in the spotlight. I am a not untypical returned Kiwi who will be clobbered if the proposals become law unless I take major steps to “undiversify” or head back overseas.

One question I have not seen raised, let alone answered, in this debate is what the thoughts are of the opposition on the proposals. Are you aware of any official stance from the National Party in terms of supporting the proposal or, better, their own plans should they return to power?

AI’m a bit worried that this topic is too much in the spotlight, and conscious that some readers unaffected by the changes must be heartily sick of it. But I keep getting so much mail about it that I feel bound to continue. We will look at other topics soon, I promise.

On the National Party’s stance, finance spokesperson John Key says the following in a statement:

“You will not be surprised to hear that I, and my colleagues, have been receiving a lot of correspondence regarding (capital gains tax on overseas investments).

“You may be aware that I have been vocal against these proposals since they were first mentioned over a year ago — issuing many press statements and asking questions in the House — and intend to continue to be so. The media is taking an interest now we have a bill before Parliament.

“We have already had a win. We believe that originally Australia was to be included, but the pressure that was applied during the initial submission process forced them to back down. There is also now the exemption for five years for GPG, which shows that changes can be made, although this one is by no means perfect.”

That’s pretty encouraging for those making submissions, and Key urges people to do so, before the July 7 deadline. “The Government does not hold an absolute majority on the Finance and Expenditure select committee, so it is possible that with a wave of public sentiment we could get changes to the bill at that stage.”

For details on making submissions, he suggests going to Click on “Select committees”.

Some of the main points from there: Your submission should include the full name of the bill, which is the Taxation (Annual Rates, Savings Investment & Misc Provisions) Bill. Include your name, address and daytime phone number.

Note that all submissions become public unless you specifically request otherwise. If you want your name and contact details kept private, include them separately and ask that they don’t become part of the public document. State if you want to appear before the committee.

If you want to see a copy of the bill, you may be able to read it at your library, or you can buy it from a Government bookshop or go to and look under “17 May 2006”. You have to wade through lots of other tax stuff, but when you get to the bits about taxation of overseas investments it is reasonably easy to follow.

Send your submissions by email to [email protected] or by mail to The Finance and Expenditure Select Committee Secretariat, Bowen House, Parliament Buildings, Wellington.

I haven’t asked National what they will do about this if they return to power, as that question seems premature. Let’s concentrate now on changing the bill, and later get National’s stance on whatever is made law.

By the way, Minister of Revenue Peter Dunne says submissions make a difference, in a — presumably standard — letter he sent to a reader.

The proposed changes, Dunne says, “are based on proposals put forward for public consultation in the government discussion document, ‘Taxation of investment income’ in June 2005, and take into account the many public submissions and letters received on this important issue.

“This feedback, together with the points made by those who have written to me, has made an important contribution to the development of the proposals outlined by myself and the Minister of Finance.”

Not everyone would agree with Dunne’s next sentence, though: “As a result, the new rules will go a long way toward providing New Zealand investors with greater certainty about how and where they choose to invest and save for their futures.”

Dunne also says the proposed changes “are an important step towards making the taxation of investment income fairer and more reasonable for all investors, irrespective of whether they choose to invest and save via a managed fund or directly.

“The new rules will also encourage greater diversification by removing existing tax barriers to New Zealanders investing in a number of countries. The current rules result in a more favourable tax treatment for investment directly and in a small group of countries (the “grey list”) at the expense of investment via managed funds and in a number of emerging economies in Asia, Latin America and Europe.”

This brings to mind a comment from one reader about a media statement from Dunne and Finance Minister Michael Cullen in which they said, “The current rules are also too harsh for investment outside the grey list, discouraging investment in other important destinations.”

The reader’s response: “So what? Change the rules that are too harsh, don’t introduce new harsh rules on people like me and my wife who have saved diligently and invested wisely.”

While we’re at it, Cullen made some interesting comments in a speech a few days ago: “As much as is possible, we want a level playing field for different types of investment and for different types of investor. And we want a regime where investment decisions are made on the basis of the merits of the investment proposal, rather than extraneous questions such as taxation.”

He went on to say that problems with the current taxation of international investments have “long been something of a Gordian Knot, and any way that one might attempt to cut through it is bound to create winners and losers.

“As is always the case, the winners are a broad group including low income earners and people who invest through managed funds; and the losers are a clearly defined group of high net worth individuals and their sharebrokers, who are easily spurred into action and ready to take out full page advertisements in the major dailies.”

Part of Cullen’s conclusion: “We are clearing away anomalies in the investment tax regime that skewed decisions and limited options for New Zealand investors.”

If you don’t agree with Dunne’s or Cullen’s assessments, you know what to do about it. As one reader puts it, “It’s one of the nice things about being part of a small country. You feel that, just maybe, an individual’s voice can have an effect.”

QMany of us think Dr. Cullen has done a reasonable job up till now. But he suddenly seems to have ‘lost it’ with this crazy offshore tax idea.

New Zealand suffers from overseas interests buying up our best companies and repatriating the profits offshore (hence our very bad balance of payments situation). Our only answer is to buy good offshore assets and bring the profits back to New Zealand, as his own New Zealand Super Fund is doing (80 per cent plus offshore). And yet he wants to penalise such progressive people!

It suits me personally (having nearly all my shares onshore in New Zealand) as people are selling their offshore shares and pushing up my New Zealand shares. But what a disaster for New Zealand.

AI’ve run your letter in preference to many other equally good ones to show that not everyone is reacting out of self interest.

QThese tax changes started with a review of managed fund over-taxation, but the review has morphed into a misplaced look at incorrectly perceived inequities between taxation of local and international shares. The potential result is a new, inappropriate and complex unrealised gains tax for individuals investing in offshore shares.

If the government focuses on the original purpose of the review, removing over-taxation within managed funds, the answer is obvious. Remove tax on international share investments for funds rather than imposing new taxes on individuals investing directly offshore. This will remove inequities and also encourage saving and the use of KiwiSaver.

ASounds a lot like common sense to me.

And you’re not the only one who thinks the inequities between tax on local shares and on offshore shares is “incorrectly perceived.” Read on.

QA rationale put forward in support of deleting the grey list exemption is that grey list companies pay lower dividends than New Zealand-based companies, and so New Zealand investors in grey list countries are tax advantaged. I suggest that this is a misconception.

Kiwi investors pay little if any tax on dividends paid by New Zealand companies, because dividend imputation gives shareholders credit for tax already paid by the company.

If a New Zealand company uses $1 of earnings to pay a dividend, it pays 67c in cash to the investor and remits an imputation credit certifying that a 33c tax has already been paid. The dividend is tax-free to an investor taxed at a 33 per cent rate.

If the investor pays tax at a 39 per cent rate, the imputation credit must be supplemented with a tax payment of 6c. It may be quite difficult finding a better deal in the grey list.

Consider a New Zealand 39 per cent taxpayer who receives a 67c cash dividend from a company based in the US where there is no imputation. A tax payment of about 26c is due. This tax is over four times larger than the tax on New Zealand-sourced dividends!

True, the average dividend yield is lower in the US than in New Zealand. But is it four times lower? The current dividend yield on the S&P 500 index is about 1.7 per cent. Multiply by four and you get 6.8 per cent. The average dividend yield of companies in the NZX 50 index is about 4.8 per cent.

Of course, one could invest in the Nasdaq 100 with an average dividend yield of just 0.33 per cent, seemingly a tax advantage. But the risks are severe. The recent Nasdaq 100 level of 2,210 is still less than half its peak of 5,060 in early 2000.

New Zealanders looking offshore for tax-advantaged investments may find them hard to come by. Grey list investments are typically tax disadvantaged, at least for diversified portfolios. In the end, the only real advantage to investing in grey list countries is diversification.

AAn excellent point. And given that you are a finance professor, you know what you are talking about.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.