VZCZCXRO3978
RR RUEHNZ
DE RUEHWL #0465/01 1702135
ZNR UUUUU ZZH
R 192135Z JUN 06
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 2909
INFO RUEHBY/AMEMBASSY CANBERRA 4453
RUEHNZ/AMCONSUL AUCKLAND 0785
RUCPDOC/USDOC WASHDC 0060
RUEATRS/DEPT OF TREASURY WASHDC
RUEHDN/AMCONSUL SYDNEY 0446

UNCLAS SECTION 01 OF 02 WELLINGTON 000465 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP-DRICCI AND EB 
STATE PASS TO USTR FOR BWEISEL 
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/ABENAISSA 
TREASURY FOR OASIA 
SYDNEY FOR CS 
 
E.O. 12958: N/A 
TAGS: EINV ECON EFIN NZ
SUBJECT: NEW ZEALAND TAX CHANGES WOULD END PREFERENCE FOR INVESTMENT 
IN U.S., AMONG OTHERS 
 
REF: WELLINGTON 396 
 
¶1. (U) This is an action request; please see Paragraph 9. 
 
¶2. (SBU) Summary:  The New Zealand government has proposed changing 
the tax treatment of overseas stock-market investments in an effort 
to protect small investors.  The proposal effectively would maintain 
a tax preference for portfolio investments in Australia, while 
removing tax benefits currently accorded portfolio investments in 
the United States and several other countries.  End summary. 
 
¶3. (U) New Zealanders' investments in any of eight countries on the 
"gray list" -- including the United States -- currently incur taxes 
only on dividends.  Under legislation introduced May 17 in 
Parliament, the gray list would be abolished.  Individuals who 
invest directly in share portfolios outside New Zealand and 
Australia would pay not only a tax on their dividends, but also a 
tax based on the change in value of their investments over the 
course of each financial year.  It would be a partial tax on capital 
gains, even if the gains were unrealized.  The tax would be applied 
on 85 percent of the paper gain in value, with the tax capped at 5 
percent of the investment's value in any given year.  (The 
carried-over tax would have to be paid if the shares were sold and 
the proceeds remitted back to New Zealand.)  The rules would apply 
to all such overseas investments worth more than NZ $50,000 (US 
$31,200).  Thus, most small investors would escape the partial 
capital-gains tax, but wealthy investors would not.  Officials 
estimate that between 10,000 to 20,000 New Zealanders would pay the 
tax.  (ABN AMRO Craigs contends that number is as many as 100,000 
people.)  Meanwhile, in general, individuals and companies that own 
10 percent or more of a foreign company would continue to pay taxes 
only on dividends. 
 
¶4. (U) Abolishing the gray list would mean that all offshore 
investments would be taxed the same, except for those in Australia. 
Holdings in Australia would be exempt from the partial capital-gains 
tax but still subject to a tax on dividends.  Finance Minister 
Cullen and Revenue Minister Dunne gave several reasons for 
Australia's special treatment, including an eventual goal of 
establishing a single investment market of Australia and New Zealand 
and the fact that Australian companies -- like New Zealand companies 
-- tend to pay out a high proportion of their profits as dividends. 
Besides Australia, the seven other countries on the gray list are: 
Canada, Germany, Japan, Norway, Spain, the United States and the 
United Kingdom. 
 
¶5. (U) The legislation also would make it more attractive to invest 
in managed funds that trade in New Zealand and Australian shares and 
that meet certain criteria as vehicles for savings and investment. 
Managed funds no longer would be taxed on capital gains from 
investing in Australian and New Zealand shares.  Instead, only the 
funds' earnings would be taxed, no longer at a flat 33 percent as 
they are now, but rather at the investor's marginal tax rate. 
Investors currently in the top income-tax bracket of 39 percent, 
however, still would have their earnings from managed funds taxed at 
33 percent. 
 
¶6. (U) The proposal is touted by its backers as a "fairer" 
investment tax regime.  According to a statement issued April 11 by 
Ministers Cullen and Dunne:  "As always there will be winners and 
losers.  The losers in this case will tend to be sophisticated 
direct investors who have enjoyed considerable tax advantages under 
the old regime. ... The winners will be thousands of ordinary, hard 
working New Zealanders."  The ministers estimated the reform would 
cost the government NZ $110 million a year in forgone tax revenue. 
The bill has been referred to the Finance and Expenditure Committee, 
which will receive public comments until July 7.  If approved by 
Parliament, the changes would take effect in April 2007. 
 
¶7. (U) Meanwhile, the government immediately introduced an amendment 
May 17 that would exclude overseas investments in certain types of 
companies from the new tax rules for five years, which would give 
the companies time to consider shifting their headquarters to New 
Zealand.  The amendment was aimed primarily at benefiting Guinness 
Peat Group, a London-based investment company that has 28,000 New 
Zealand shareholders. 
 
¶8. (U) The proposals on managed funds should encourage investment in 
the New Zealand stock market, while the changes for individual 
investors should encourage those looking for overseas investments to 
focus on Australia.  The National Party condemned the tax proposal 
 
WELLINGTON 00000465  002 OF 002 
 
 
as unfairly targeting New Zealanders who invest offshore.  Business 
New Zealand, which represents business and employers' interests, 
criticized the changes for making it difficult for New Zealanders to 
diversify their portfolios. 
 
¶9. (SBU) Action requested:  New Zealand companies and individuals 
held NZ $15.7 billion (US $9.8 billion) in U.S. portfolio 
investments as of March 2005, or 44.7 percent of the stock of New 
Zealand's portfolio investment overseas.  (Portfolio investment in 
Australia was only NZ $5.8 billion, or 16.5 percent of the total.) 
The Canadian consul in Auckland has asked post whether the U.S. 
government would take action on the tax proposal, noting the 
preference that it gives to investment domestically and in 
Australia.  Post seeks Department guidance as to how to answer this 
inquiry.  Post also recommends that, if U.S. agencies have questions 
or concerns about this proposed policy, it be added to the agenda 
for the U.S.-New Zealand Trade and Investment Framework Agreement 
discussions later this month. 
 
MCCORMICK