The government’s intention to change the taxation of investor’s returns was announced by Minister of Revenue Michael Culen in his budget speech this year. The follow-up media release on June 28 is mild, but the simultaneous, lengthy ‘discussion document’ released by the IRD's, Policy Advice Division reveals advanced planning for a serious new distortion and tax-grab from investors.
If successful, the plan will result in significantly dimmer prospects for private portfolios beyond the April Fool’s Day, 2007 start date. Important changes proposed are:
Effects will include:
a) New Zealand will switch overnight from having a competitive and efficient regime for private client portfolio investors to operate from, to an unattractive place in which to hold offshore investments, with probably the most punitive tax regime anywhere.
b) Portfolio gains from the offshore components of portfolios will be up to 39% less, while additional accounting, transacting to realize cash for taxes, banking and tax filing will incur costs.
c) New Zealand assets, including property and shares in New Zealand-domiciled companies may be re-priced by dint of their tax advantage, but only alluring for investors while capital gains are sustained. Income yields may eventually be lower.
d) Those fund managers deciding to set up new “Qualifying Collective Investment Vehicles” will be able to exploit tax-free trading gains in the New Zealand markets. QCIV’s may be able to stag new issues of NZ shares, or ‘wash trade’ taxable dividends into tax-free capital gains.
e) Increased value of offshore holdings caused by depreciation of our heady New Zealand dollar will become taxable. Either portfolio diversification costs will be considerably higher, or country risk management will be compromised.
f) Private clients will need to respond to new, optimal asset allocations. Trustee will need to reassess what earlier constituted a prudent approach to investing. To suffer double taxation on offshore holdings, versus venturing into less savoury domiciles will need to be weighed.
g) Avoidance and emigration industries will receive a boost.
Diversified’s View:
Diversified’s considered view is that the proposed changes will significantly reduce efficiency of private provisioning for retirement via New Zealand investment portfolio.
Wealth owned will be lesser in the long term, due to the additional taxes levied on investors, and by discouragement of potential savers by low net returns legally achievable and by the additional requirements of filing and remitting taxes.
Creating a tax-driven incentive to favour investing in New Zealand assets, and a disincentive for normal international diversification, constitutes a new and major distortion of optimal investment allocation.
Investors successfully coerced into favouring New Zealand assets at the expense of international diversification, are likely to have lesser net worth at retirement than may otherwise have been achieved, due to the restricted range of opportunities available locally, and New Zealand’s lower sustainable growth rate, than elsewhere.
The supposition that investors will be encouraged to use local fund managers because of a slight tax advantage, may not reach the levels expected. Additional tiers of fees and costs, poor performance, poor transparency and limited variety of local offerings, especially to access international investment opportunities, will persist as impediments.
Further, prior tax advantages have demonstrated the fund managers themselves capture a portion of the tax savings, in the form of higher fees.
The Minister of Revenue’s Media Statement of June 28 is disingenuous. The rules are not ‘fairer’. The IRD’s 75-page ‘discussion document’, reveals the full agenda.
Make no mistake; this is a new tax grab, relegating individual well-being behind government’s ‘national welfare maximization’, and ‘world welfare maximization’ considerations [Italicised phrases from the discussion document].
The IRD Policy Advice Division’s, ideology-driven tome matches its’ peculiar view of commerce and wealth creation, with an endearing naivety of the tax loopholes it is inadvertently creating.
What you can do?
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