Over the last three or four years youwill have heard a lot about proposals for reforming therules on the taxation of domestic investment through managedfunds and the taxation of offshore portfolio investment inshares.

The arguments and counter arguments for changecan be highly technical - with talk of things likecollective investment vehicles, flow-through, the foreigninvestment fund rules, the grey list, deemed rates of returnand so on, and can generate much heat. The result is adebate that can be difficult for people outside the savingsand investment industries to follow.

It is these people,however, who are central to the reform of the tax rules onretirement savings.

They are often ordinary, middle-classpeople with a family, a house in the suburbs, a mortgage anda hundred competing demands on their discretionary income.They often must struggle to save for retirement, and whenthey do they probably invest through managed funds ratherthan invest directly in overseas shares, for which theyprobably lack experience and confidence.

For all of them,whatever their savings and however they are structured,there is a sense of pride at what they have been able toachieve. They feel they have heeded the message aboutprudent planning for the future, and they become angry andfrustrated if they sense the rules are being changed in away that disadvantages their decisions.

For many others,though, saving for retirement is still too often put intothe "do it tomorrow" basket.

The new KiwiSaver scheme hasthe potential to turn that mindset around. It will provide amechanism for ordinary people to save automatically, withouthaving to think too much about it. The aim is to make it aseasy to save in the future as it is now not to save atall.

It is obviously essential that the tax rules do notdisadvantage investors through KiwiSaver funds over otherkinds of investors. More generally, it is also importantthat the tax rules themselves do not become the driver ofparticular forms of saving.

At present, however, therules do create distortions.

People who save through NewZealand managed funds such as superannuation funds and unittrusts are taxed more heavily than people who investdirectly.

The reasons for the over-taxation are thatmanaged funds are generally taxed on their realised shareprofits, and are generally taxed at 33%, although their taxrates could be below 33%.

As you know, the government hasproposed new rules to resolve the problem, using the conceptof a qualifying collective investment vehicle.

Under thenew rules, realised gains on shares in New Zealand companieswould not be taxed, and taxable income would flow through toinvestors in the fund and be taxed at their personal taxrates.

These new rules are necessary if KiwiSaver is towork as intended - and reverse that non-savings mindset.They will prevent low-income people investing throughKiwiSaver funds from being over-taxed.

For this reason itwill be essential for the CIV rules to come into effect intandem with the start-up of KiwiSaver, which is 1 April nextyear.

A basic principle of taxing investment income isthat the tax rules themselves should not create investmentdistortions. Investments should be taxed the same regardlessof where the investment is located, and those who investthrough intermediaries such as managed funds should be taxedin the same way as those who invest directly.

The currenttax rules on investment operate very unevenly. They over-taxsome investors, they favour direct investment by individualsover investment through funds, and they favour investment insome countries over others.

What any reform of the rulesmust do is to right the imbalance, which is very difficultto do because of the competing interests involved. Thereforethe government is trying to achieve a reasonable balancebetween those competing interests.

In achieving areasonable balance, it is inevitable that there will bewinners and losers - the many winners will be those who losedisadvantages, and the losers will be those who lose theiradvantages.

It most certainly will not be a money grab bythe government.

Striking the balance will be expensiveand is estimated to cost more than $100 million in lostrevenue. That is a cost that the government has chosen tobear - over competing priorities - because it is essentialto get the investment rules right.

That is only fair. AsI said earlier, in order to save for their retirement, theordinary couple with a family must find some room in thefamily budget to give priority to retirement savings.

Itis reasonable, therefore, to expect the government to makesome room in its Budget to make the taxation of retirementsavings fairer. I am completely confident that this will bedone.

The government has consulted extensively on itsproposals to apply consistent tax rules to different typesof investment, including offshore portfolio investments inshares. For the latter, consistency would mean that underthe proposals released last year investments into the seven'grey list countries' would no longer receive a taxpreference but would be taxable under more consistentrules.

On the other hand, investment outside thosecountries, including some of New Zealand's high-growth Asiantrading partners, would receive a more reasonable taxtreatment than at present.

On the whole, those changeswould affect higher wealth direct investors, who at presenthave a tax advantage over managed funds. The changes wouldhave little effect on managed funds, which are already taxedon their business gains.

Submissions on the discussiondocument which set out the proposals broadly supported theproposals relating to domestic investment through thecollective investment vehicles that I mentioned earlier. Allwas more or less well with that side of the proposedreform.

The vast majority of submissions, however, andover 800 were received, focused on the offshore proposalsand were almost unanimously opposed to changing the taxrules for offshore investment.

Some of the main concernsexpressed in submissions were that the changes would taxunrealised capital gains, would advantage funds, wouldincrease tax on investments into Australia, and the ruleswould be too complex for individuals to comply with.

Iwill not go into the details of the proposals relating tooffshore investment - the next speaker, David Carrigan, willdo that. But I do want to assure you that the government islistening to the concerns and has consulted widely, onceagain, on modified proposals that take account of some ofthe key concerns that have been raised, while retaining thekey policy aim of the original proposals.

One approachwould be to treat investments in Australian companies in asimilar manner to New Zealand investments. That would resultin tax being paid broadly on dividends.

A differentapproach for Australia could be justified on the basis that,as in New Zealand, Australian dividend yields arereasonable. It could also be justified on the grounds of theCloser Economic Relationship between the two countries.

Officials have now reported to Ministers and we hope tobe in a position to announce policy decisions over the nextfew weeks. A tax bill scheduled for introduction in May isexpected to introduce changes relating to domesticinvestment and CIVs, as well as some relating to thetaxation of offshore portfolio investment in shares.

AsMinister of Revenue, I am looking for a reasonable,pragmatic solution that produces a fairer result forordinary families struggling to put that little bit aside tosupplement their retirement income.

I accept thatalthough the final package will have many winners, therewill also be some losers. That is the inevitable result ofbringing more balance to a tax system that is heavily skewedagainst family retirement savings.

I look forward tobeing able to be able to give your more information in thenear future.

Thankyou.

ENDS
THIS ISSUE Lead NZ News NZ Politics World News FeaturesNew Zealand Politics

POLITICAL NEWSLETTERS: Transtasman Political Letter -- 23 March Digest The Letter -- Monday, 27 March 2006 Molesworth & Featherston (Weekend) -- March 25 2006

Welfare: Super Supersized - "People receiving New Zealand Superannuation and Veterans Pension will be better off by up to $420 extra a year," Social Development and Employment Minister David Benson-Pope and Associate Minister for Senior Citizens, Winston Peters, announced today. New Zealand Superannuation and Veterans Pensions will increase by 3.16% from 1 April 2006 following the increase in the cost of living for 2005, as measured by the Consumers Price Index. See... 490,000 older New Zealanders to benefit from Super increases ALSO:NZ First - New Zealand First Delivers on Super for SeniorsNZ First - Peters Speech - "Preparing For A Golden Age" Also on April 1NZ Govt - Tax Relief: Three in four families eligibleNZ Govt - 1 April marks new era for student loans

One Law for All: Microchipping debate goes to the dogs - Farmers will not give up the fight to convince the government to exempt farm dogs from an idiotic law forcing all dogs to be microchipped, said Charlie Pedersen, President of Federated Farmers of New Zealand (Inc). "Federated Farmers is very disappointed. Despite the federation offering many compelling reasons why farm dogs should be exempted, the government has chosen to base its policy on cliches and soundbites," Mr Pedersen said. See... Government Blows Opportunity ALSO:Scoop: PM's presser - Blair, Chipping Dogs And Rodney HideFederated Farmers - Farmers Consider OptionsNational - Anderton fails the test over farm dog microchippingNational - Anderton a lame duck over farm dog microchippingMaori Party - Flavell: Notice of MotionUnited Future - Copeland: Microchipping decision shortsightedUnited Future - Copeland launches bid to scrap farm dog microchippingKennel Club - Licensing dog owners the best solution

MORE POLITICAL HEADLINES:NZ Govt - Cullen - Design in Business Academic Forum NZ Govt - PM congratulates Margaret Mahy NZ Govt - Brash supports charging patients for surgery NZ Govt - Cunliffe - National Refugee Resettlement Forum NZ Govt - Literacy standards can be raised for all students Joint Statement - Time for tough decision-making on binge drinking National - Mapp: Mallard's comments "a bit rich" Maori Party - Labour in a Whirl over Media Spin of Maori MembersMaori Party - Sharples: Crimes of Torture Amendment Bill Maori Party - Flavell: Notice of Motion United Future - UF to back four Members' Bills United Future - Turner on bringing up the kids in NZ

POLITICAL COLUMNSCelebrating Families (Judith Collins): 28 March 2006Newman Weekly: Lowering the BarMarc my Words: Tax - a state sponsored muggingwww.mccully.co.nz 24 March 2006 Heather Roy's Diary - 24 March 2006Gerry: In the House - 24 March 2006Plain English - 24 March 2006The Mapp Report 17 March 2006Newsworthy: Claims by prisoners soar

SCOOP WAS IN THE HOUSE:Questions And Answers - Thursday 23 March 2006Questions And Answers - Wednesday 22 March 2006Questions And Answers - Tuesday 21 March 2006

FOR MORE POLITICS NEWS HEADLINES > CLICK HERE

Source: scoop