IRD steps into tax reform stoush

Details released which should let high tech startups live on

The latest proposals from Inland Revenue go a long way to assuaging concerns about planned tax reform legislation.

Venture capitalist Jenny Morel says that the changes to the tax regime as originally proposed would have been “a complete disaster”.

“We need access to smart capital” and that often means overseas capital, she says. Right Hemisphere, the 3D tool developer in which Morel’s company has invested, has a much larger investment from overseas, “If you want to grow big companies you can’t expect to have about 30% or more [in the hands of NZ investors].”

Software developer John Blackham told Computerworld (May 15) that the initial proposal to introduce a capital gains tax on investment in companies based in New Zealand but which have an overseas’ investment base, typical of many IT startups, would be a “death sentence” for innovation in this country.

He and fellow entrepreneurs made proposals to ministers for ways of alleviating the burden last month, and the government announced a partial back-down as part of its budget round, saying it would give certain investors in these companies a five-year “holiday” from the new tax.

Initial concerns that the amendments would do little, if anything, to mitigate damage to the high-tech sector have been soothed by government assurances.

Morel says she had not read the detail of the amendments proposed in the IRD document when she spoke to Computerworld, but she is hopeful the threat of a capital gains tax of between 33% and 39% will be lifted. Even so, it could mean investment proposals will be stalled for some months while the amendments go through Parliament, she says.

A spokesman for revenue minister Peter Dunne passed on comment from an IRD source last month which indicated an intention to avoid handicapping a wide range of New Zealand-founded companies helped by US venture capital.

“There is a separate exception in the proposed offshore tax rules designed for venture capital companies that migrate offshore to access offshore capital,” says the IRD. “Investments in certain foreign companies resident in ‘grey list’ countries [Australia, Britain, the US, Japan, Canada, Norway and Germany] will not be subject to the new rules. This exemption will apply when the total number of New Zealand shareholders is 100 or fewer (not including any widely held investors such as superannuation funds) and these shareholders collectively own 10% or more of the foreign company.

“The exception for venture capital companies will continue to be developed through the bill process in order to ensure that the offshore tax rules do not apply inappropriately to venture capital companies accessing offshore finance,” says the IRD source.

Blackham says these conditions appear to handle his reservations “unless there’s some quirk.”

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