Tax changes to create a fairer savings regime for low income and small investors are outlined in Budget 2005.

Finance Minister Michael Cullen said the proposals, which developed out of the Craig Stobo report Toward Consensus on the Taxation of Investment Income, would remove current inconsistencies in the treatment of different taxpayers and investments and would create a more transparent and coherent tax environment.

They will:

• eliminate a tax disadvantage applying to collective funds and;
• ensure that income from these funds is taxed at the recipient’s correct tax rate.

"The new rules, to come into effect on 1 April 2007, will apply to registered superannuation schemes, group investment funds, widely held unit trusts and other entities which have savings as their primary function.

"Currently gains from the sales of New Zealand shares tend to be taxed if the shares were bought through a collective fund but not if they were bought directly. This anomaly disadvantages collective funds and will be removed.

"The second rule change will allow the income from investments through managed funds to 'flow through' to the saver’s normal income tax rate, whether that be 19.5 per cent, 33 per cent or 39 per cent. Now many are taxed at a flat 33 per cent, which delivers a modest incentive to people on the 39 per cent rate but penalises lower income earners on 19.5 per cent.

"The two changes are inter-linked and voluntary. Not all funds are equipped to make the transition immediately. Those that are will have to decide what offers the best deal to their members," Dr Cullen said.

He said the issue of offshore investment was proving more difficult. The government had considered using a version of the risk free rate of return method but had rejected this as administratively complex and also because of "perception problems" surrounding the requirement that tax be applied even when the investor had incurred losses.

"Officials are now focussing instead on an income calculation system based on actual shifts in value," Dr Cullen said.

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Background information is attached at the head of this online statement at www.beehive.govt.nz/cullen .

Details will be outlined in a forthcoming discussion document.