Managed fund capital gains tax on shares

WELLINGTON: Managed funds, including KiwiSaver schemes, will pay unrealised capital gains tax on changes in the value of the New Zealand and Australian shares if the recommendations of the Tax Working Group applying to portfolio investment entities is applied.

Such funds should be ‘‘taxed on their Australasian shares on an accrual basis,’’ the TWG recommends, meaning tax would be payable or available for refund if a fund recorded gains or losses in the value of the Australasian assets in its portfolio even if they had not been sold.

However, sharemarket operator NZX is warning that change ‘‘would narrow participation in the New Zealand market’’.

The rest of the capital gains tax proposals released yesterday recommend applying the tax only on ‘‘realised’’ capital gains, which are measured when an asset is sold.

However, fund managers are already used to the taxation of unrealised gains on assets, mainly shares, bonds and property, held in other countries and are understood to have advised the TWG that taxing Portfolio Investment Entities (PIE) on realised gains from the sale of New Zealand and Australian assets would be an administrative nightmare.

Nonetheless, it means that the 15% or so of Australasian assets that a typical ‘‘balanced’’ KiwiSaver fund would hold would be subject to tax when previously they weren’t.

The TWG recommends offsetting this impact for people on low and middle incomes in KiwiSaver schemes by rebating the tax employers pay on their contributions to employees’ schemes back into the employees’ scheme. The group also recommends letting lowand middleincome earners pay the lowest personal tax rate, 10.5%, on a larger proportion of their income.

‘‘These measures would help offset any negative effects arising from an extension of capital gains taxation,’’ the group notes.

NZX issued comments opposing the proposals, which it said would ‘‘discourage investment in New Zealand businesses and stunt the growth of our capital markets’’.

‘‘New Zealanders are already taxed on income used to acquire shares. Being taxed twice would be unfair,’’ chief executive Mark Peterson said in emailed comments. He feared the changes would lead to increased offshore investment by New Zealand individual and managed fund investors.

Taxing unrealised capital gains on PIE funds ‘‘marks a return to the ‘bad old days’ when Kiwis paid more tax on managed funds than direct share investments,’’ Anthony Edmonds said.

He noted it was working group chairman Sir Michael Cullen who introduced the PIE scheme in the 2000s. — BusinessDesk