Monday, June 2, 2008

Nail in coffin for finance companies?

The future is looking even bleaker for struggling finance companies in New Zealand, in the wake of Kiwibank's weekend announcement it is launching the Kiwibank Term Deposit PIE.

(PIEs, or Portfolio Investment Entities, are exempt from capital gains tax on most New Zealand and Australian shares. Also, the tax paid on investment income is at the tax rate of the individual investor, capped at 30 percent, rather than at a flat rate.)

The Kiwibank product will replicate the characteristics of the bank's term deposits, but boost investor returns. In fact, Kiwibank chief executive Sam Knowles says Kiwibank has calculated that if all term deposits convert to PIEs, savers will pay $100 million less in tax.

From this week, investors in the Kiwibank Term Deposit PIE will be offered a one-year rate of 8.4 percent, which is equivalent to a before-tax rate of 9.64 percent on an ordinary term deposit for 39-percent taxpayers.

This compares with the 9.75 percent paid by Fisher & Paykel Finance, the 10.05 percent paid by Hanover, the 9.85 percent paid by Orange Finance and the 9.75 percent paid by South Canterbury Finance.

Investors in the higher tax brackets are therefore going to ask: Is that little extra worth the additional risk?

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