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Ralph
... Implications
For Investors
...
Although ostensibly
a review of business taxation, the second Ralph report, "A Platform
for Consultation", carries extensive implications for investors.
On a positive note, it addresses
some of the issues for investors, in particular the taxation of unit
trusts.
However, there are still
serious potential problems facing tax preferred income distributions,
pooled superannuation trusts, life offices, and wholesale unit trusts
in particular. A consultation period is now underway until mid-April
during which the industry is making efforts to address these issues.
Unit Trusts and Listed Property
Trusts
The Government has confirmed
that cash management trusts, and, in principle, all publicly offered
widely held collective investments that pay out all their taxable
income each year will be excluded from the entity taxation principles.
This is welcome news but
the critical definitions remain to be determined - particularly "widely
held".
Wholesale unit trusts face
problems. These are often dominated by a few large unitholders - typically
the trustees of superannuation funds, especially master trusts. As
such they are indirectly widely held but might fail a strict test.
There is, however, a legislative precedent for testing the indirect
ownership.
Superannuation
One of the biggest disappointments
is that pooled superannuation trusts (PSTs) remain caught in entity
taxation and face an increase in tax from 15 per cent to 36 per cent.
Although it is suggested
that a franking system would apply, we believe that PSTs taxed at
36 per cent would become fundamentally unattractive to super funds
as an investment vehicle. We would anticipate much of the money in
PSTs - over $75 billion - shifting to other vehicles in a short space
of time, potentially causing havoc in the industry and investment
markets, and imposing substantial taxation and transaction costs on
super fund members.
Tax preferred income from Unit
Trusts
At the present time, unit
trusts pass through tax preferred income, typically derived from property
or infrastructure investments. Some of this is tax deferred - resulting
in a reduction of the cost base of the investment - and some is permanently
tax-free.
The report outlines two options:
- Continue with the existing
system but eliminate the cost base reduction.
- Prevent tax-preferred
income from retaining its character on distribution; ie tax preferred
income would become assessable if distributed.
The first option is an improvement
on the current system; the second would be negative for investors.
Life insurers
Life insurers and their
customers are the big losers so far, and appear to be facing entity
taxation on all business - including superannuation - and on income,
unrealised capital gains, and reserves.
The most serious impact
would appear to fall on capital guaranteed products, which are supported
by reserves. The taxation of income earned on reserves, and non-allocated
pension income at 36 per cent would significantly reduce the ability
of life offices to offer attractive rates on such products and may
affect their ability to support existing business.
What Rothschild is doing
We and much of the industry
are particularly concerned that potential impacts on PSTs, wholesale
unit trusts, and life insurers could result in massive shifts of assets
between different types of collective investments.
This would be likely to
result in substantial tax plus transaction, administrative, and compliance
costs for many investors, which, at the end of the day, can only come
from the value of investors' holdings. There is also potential for
massive disruption of investment markets as a substantial amount of
assets shifts in a relatively short space of time.
In most aspects, the industry is seeking to a status quo for collective
investments in order to protect investors:
- A favourable definition
of "widely held" for unit trusts which accommodates wholesale unit
trusts,
- A complete carve out for
superannuation, and
- Selection of the improved
option for the distribution of tax preferred income from unit trusts.
For
more information about Rothschild,
phone us on 1300 65 65 68
between 8.00am and 7.00pm (Sydney time), Monday
to Friday,
contact your financial planner,
or click here to visit our website
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Rothschild
Disclaimer
The detail contained
in this update is for information only. Every effort has been made
to ensure that it is accurate; however, it is not intended to be a
complete description of the matters described. It is based on information
available at the time of preparation. In all cases investors should
consult their taxation adviser as to their own taxation position.
Opinions constitute our judgement at the time of issue and are subject
to change.
AFSD
Disclaimer Notice
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