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New Zealand

The New Zealand Stock Exchange (NZSE) has launched a new managed fund (the TeNZ fund) which tracks the NZSE10 Index (the Index). The Index is a weighted index made up of selected securities of New Zealand's top 10 listed companies, by market capitalization, which has the principal purpose of providing a measure of price trends of those companies. The TeNZ fund is a passive fund which will own a diversified portfolio of securities in the same weightings as the Index with the aim of providing investment results that correspond to the performance of the Index. Investors will purchase units in the fund, and the units will be tradeable on the NZSE.

Although the fund has been welcomed in some quarters as enabling investors to achieve an index-weighted exposure to the market without the need for management on their part, it has also attracted criticism. Fund managers and institutional brokers claim the NZSE is competing directly with their clients' products and with its own members. Further, the fund created controversy when first announced because it became apparent that TeNZ had a dual tax advantage enjoyed by no other New Zealand managed fund.

The first tax advantage arises as a result of a private binding ruling obtained from the Inland Revenue Department. That ruling provided that any gains from the sale of shares by TeNZ, in order to match the composition and weighting of the Index, would not be taxable to the fund because it was considered to be a passive investor and not a share trader. The second advantage arises as a result of TeNZ's classification as a Group Investment Fund (GIF). GIFs were originally established so that trustee companies, which were managing many (often small) trusts and estates could manage them more effectively by pooling the investments. GIFs have since become increasingly used for commercial activities and an amendment to the law in 1992 had the unintended effect of allowing them to make tax free distributions. However, in response to an outcry by fund managers, the government has recently announced that it plans to close this loophole.

Denis Clifford and Chris Maher

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