Tax Advisers - Deloitte

New Zealand
While the FDR proposals should result in a similar level of tax payable to what would
be payable if only dividends were taxable, this will not always be the case.
FDR has elements of a capital gains tax to the extent that the FDR rate is perceived to
be greater than what is fair. It could also be said that FDR is no more than an asset tax,
given the complete disconnection to the actual income that is derived. For example, if
an investor purchases $100,000 of shares. In the next year, the shares are worth
$80,000, with no tax payable (for certain direct investors). If the shares then rise in
value at the rate of 6% per annum, they will be worth $84,800, $89,888, $95,281 and
$101,000 in the following income years. The investor is taxed on 5% of these opening
values in each income year, which represent no more than a recovery of economic
value.
This will be difficult for many taxpayers to comprehend and unlikely to result in
positive views on the fairness of the system.
The approach also encourages a beat the rate mentality, where high-yielding
investments will be structured into the FDR approach to reduce their effective tax rate,
resulting in guaranteed investment return type rules.
The effective FDR rate for some investors of 3.5% also incentivises direct investment
into nonresident funds (to ultimately be exposed to an expected 3.5% FDR) rather
than the 5% rate.
The impetus to remove investment distortions has been in part achieved. However, as
the FDR rules have a general disconnection to economic or traditional concepts of
income, they can result in inequities. They also create a beat the rate incentive.
The nuances, both positive and negative, that will flow from the new rules are likely
to engross investors and advisors for a considerable time to come. Outside of a funds
context, the measures are only likely to be viewed positively by investors if they believe
they can beat the rate.
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