General issues
Issue: Certificate of exemption for RWT
Submission
(31 – NZ Funds)
PIEs should be automatically exempt from RWT and should not be required to apply for certificates of exemption from RWT.
Comment
Officials consider that the main concern underlying the submission (ongoing compliance costs for PIEs) can be accommodated through a change to Inland Revenue administrative processes. This would entail PIEs being granted open-ended RWT exemption certificates. While this would not remove the up-front requirement for PIEs to apply for an RWT exemption certificate, it would reduce compliance costs as future applications would not be necessary.
Recommendation
That it be noted that the concern underlying the submission has been addressed.
Issue: Application of fund withdrawal tax rules to superannuation funds that have elected to be portfolio tax rate entities
Submission
(33 – Investment Savings and Insurance Association of NZ Inc, 32 – KPMG, 60 – ASB)
The fund withdrawal tax of an investor should not be allowed to affect the PIE taxable income calculations relating to other investors in the portfolio tax rate entity. The amount of fund withdrawal tax deducted from an investor should be payable as a separate tax payment (outside of the PIE tax rules). This can be by way of a new fund withdrawal tax payment form. The portfolio tax rate entity will make the payment annually, no later than 30 June, which will represent deductions made from withdrawals for the tax year to 31 March. For example, for a portfolio tax rate entity with a 31 March balance date, the initial year payment due on 30 June 2009 would include deductions made from withdrawals from the start date as a portfolio tax rate entity to 31 March 2009.
Comment
Officials consider that this issue can be dealt with by ensuring that income that a PIE derives under the fund withdrawal tax rules should be treated as income to which no investor has an entitlement. This effectively results in the PIE accounting for the tax separately and paying tax at the PIE tax rate of 30%. The amendment should apply from the start of the 2008–09 income year.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Currency hedging and FDR investments
Submission
(32 – KPMG, 33 – Investment Savings and Insurance Association of NZ Inc)
Fully hedged foreign assets which are subject to the fair dividend rate (FDR) within a PIE should be fully subject to FDR. The hedging should also be taxed under FDR. This would ensure that 100 percent hedging before tax would also be 100 percent hedging after tax for all investors in the PIE.
Comment
Officials agree conceptually that there is an argument that foreign exchange contracts that have been entered by a PIE to fully hedge the PIE’s assets that are subject to FDR should be subject to FDR along with the foreign asset that is hedged. This approach would allow PIEs to create an effective post-tax hedge for their investors. In addition, this approach should result in less volatile revenue flows for the government as the gain or loss on the foreign exchange contract would be neither taxable nor deductible.
However, further work and consultation with the managed funds’ industry is necessary to develop the detail of any solution. It is therefore recommended that officials consider this submission further in consultation with the PIE industry with a view to introducing a legislative change later this year.
Recommendation
That officials consider this submission further in consultation with the managed funds’ industry and other interested parties.
Issue: Consolidated tax group including portfolio tax rate entities
Submission
(33 – Investment Savings and Insurance Association of NZ Inc)
The provisions relating to common ownership and wholly owned groups of companies (section IC 4) should be amended to clarify that a wholly owned group of companies can include portfolio tax rate entities and that this can apply to a portfolio tax rate entity that owns 66 percent of the voting interests in portfolio land companies.
Comment
The policy intention of the grouping rules as they apply to portfolio tax rate entities is that the benefits of the wholly owned group rules apply when a portfolio tax rate entity parent owns 100 percent of the underlying companies and the underlying companies are portfolio tax rate entities or portfolio land companies. The submission is correct that this policy intention has not been reflected in the rewritten provision in the bill. Officials therefore recommend that the bill be amended to confirm the policy intention.
The amendment should apply from the recommended application date of the rewritten PIE rules – that is, 1 April 2010.
Officials, however, do not agree that the 100 percent ownership requirement be reduced to 66 percent as this would undermine the policy intention of the PIE rules.
Recommendation
That the submission be accepted in part.
Issue: Imputation credit of ICA company passed on by portfolio tax rate entity
Submission
(20 – BDO Spicers)
An imputation credit account (ICA) company is allowed an imputation credit for the amount of imputation credit allocated to it by a portfolio tax rate entity, from 1 April 2008. The Income Tax Act 2004 should similarly be amended so the provision applies for the 2007–08 income year.
Comment
Officials agree that an ICA company should be allowed an imputation credit for the amount of imputation credit allocated to it by a portfolio tax rate entity.
Recommendation
That the submission be accepted.