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CGT 'could skew investment'

Labour’s proposal to apply a capital gains tax to investments in shares – unless they are part of KiwiSaver – could encourage people to move out of more liquid investments, one fund manager says.

Thursday, September 4th 2014, 6:00AM 10 Comments

by Susan Edmunds

David Cunliffe told media yesterday that the 15% capital gains tax his party is proposing would not apply to KiwiSaver but would apply to other investments in shares.

New Zealand PIE funds are not taxed on capital gains or losses at present.

Pathfinder’s John Berry said that would create a huge tax advantage for the Government retirement savings scheme. "As I understand it the point of Labour's CGT policy is to discourage investment in housing and redirect investment into more productive areas of the economy.  However I'm not sure putting the same tax on housing and shares does much to drive investors out of housing and into shares - on a relative basis you haven't changed anything."

The CGT under Labour would apply to net gains. The only exemptions are for the family home, personal assets, collectables, small business assets and payouts from retirement savings schemes.

It will be apply to gains accrued after the tax is implemented and tax will be applied on realisation. Capital losses will be able to be carried forward and offset against future capital gains.

Share traders will continue to be taxed at a marginal or business tax rate.

Berry said the proposal created a risk that investor funds would move from liquid investments, such as PIE funds, to KiwiSaver funds, which are locked up until retirement.

“I think it would be really unhelpful if there was asymmetry between managed funds and KiwiSaver. That would encourage people, because it would be tax-advantaged effectively, to take their money out of managed funds and put it into KiwiSaver.”

He said PIE funds worked well as they were. “When you’re investing in New Zealand shares, there’s no CGT. Traders outside PIEs do pay capital gains tax. That’s a helpful structure. We invest in international shares and I don’t know what this would mean for the FDR. Would they keep the FDR and not apply a capital gains tax, or apply a capital gains tax?”

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Comments from our readers

On 4 September 2014 at 9:14 pm Chris said:
So someone who is 65 (and eligible for a full KiwiSaver withdrawal)can keep their savings in KiwiSaver beyond 65, keep contributing and pay no CGT. But if they withdrew it and put it into an identical non-KiwiSaver PIE fund they would pay CGT.... One of the reasons I don't like a more advanced CGT is because it adds complexity and that is before talking about family homes in Trusts.
On 5 September 2014 at 7:55 am Pragmatic said:
I don't think so John - at least: it hasn't been a trend in jurisdictions where capital gains is / has been present

Where emotion appears to overwhelm facts is that CGT is applied to gains only.... meaning that you pay tax on your gains. To put this another way: if you earn money, you'll share some of this with the taxman - if not, there will be nothing to share.

Whilst it's not desirable to have another tax, CGT doesn't appear to have distorted markets (property included) in places where it exists
On 5 September 2014 at 10:32 am Peter Browne said:
I think that the application of the CGT to shares will put weight into the balance of passive funds as against active funds where the shares in the funds are bought and sold when short term gains from doing so are perceived. Presumably the CGT would need to be factored into the acceptable gain margin and also complicate the periodic reporting to investors.
On 5 September 2014 at 12:38 pm traveller said:
The thing that interests me about Labour's plan for CGT is: who is going to appoint this "expert panel" which Labour will rely on to detail the tax?
And who will set the brief? You can just imagine what the panel will comprise and likely lacking much understanding of tax or economics.
Can't imagine a panel coming back and saying they don't believe it will work.
On 5 September 2014 at 4:16 pm John Berry said:
Pragmatic - thanks - I think you'll find the UK experience (shares & property suffer CGT outside pension funds but not inside pension funds) in fact has skewed investment decisions by investors. The incentive is no different to high rate tax payers using cash PIEs instead of cash deposits. (see also Chris' example above).

The point of my comments is not to argue whether CGT is right or wrong for the country but rather to point out that PIEs and kiwisaver should be taxed the same - or you risk investors basing investment decisions around tax. With any tax fewer exemptions (distortions) is better.
On 8 September 2014 at 9:41 am Wayne Ross said:
Absolutely it is a bad idea to try and manipulate individual investment decisions using tax. There are already enough anomolies between PIE, FDR and direct investment tax outcomes. I cant think why Labour believes individuals who are already prepared to back NZ companies by investing in them be penalised over investing via a (likely) higher cost managed fund structure.
On 9 September 2014 at 9:39 am Brendon said:
Labour's CGT policy says "the tax will be applied to net capital gains." See page 6 of https://www.labour.org.nz/sites/default/files/issues/capital_gains_tax.pdf.

Labour also says they "decided against adjusting the gain for inflation (i.e indexation) based international experience. Australia and the UK used to, but both abandoned it due to the practical difficulties it created." - page 5.

So Australia & the UK originally thought that it was a good idea to tax ONLY the "real capital gain" that is realised, but as they later found, it was too difficult to do in practice. This is a flaw in the Labour CGT policy.

Inflation is not a real gain, and should not be subject to CGT.

This is an example of the FAR reaching consequences of CGT. It's complex, but Labour decided it's a great way to fund their spending promises. They know it is too "difficult in practice" to implement as experienced elsewhere. However they throw away rhetoric statements such as "Setting the CGT rate lower than the rate on other forms of income makes allowance for the effect of inflation", hoping NZ ignore this major issue. REALLY?

This is why, if CGT fits for NZ, it should be properly scoped out, with cross party support, not promised by one side, and constantly manipulated each time there is a change in Government, such as what has/is happening with KiwiSaver.
On 9 September 2014 at 12:39 pm Thom Bentley said:
Hi, there are a couple of key things to bear in mind about the UK system.

Firstly, all individuals get a CGT free allowance of GBP11,000 each year, so the first 11,000 of any gain each year is tax free.

Secondly, the UK has Individual Savings Accounts (ISAs) which enable individuals to invest a significant sum each year completely tax free (currently GBP 15,000). Since 1999/2000 when this was introduced the total amount an individual could have invested in ISAs is nearly GBP90,000.

These two combined mean that in reality very few UK taxpayers (as a percentage) pay CGT.
On 9 September 2014 at 1:04 pm AFA Muggins said:
I'm beginning to wonder, if Government should simply work out what a subsistence budget would be for survival at an individual and household level, then simply tax all income at 100% above that rate.

Income tax /household local body rating / GST / GST on tax (petrol) / tax on investment realised and unrealised / capital gains tax / etc etc

New Zealand must surely be one of the most expensive places on earth to live. I have done a direct comparison on living and business costs with a friend in California and FX adjusted the figures. He is stunned at the outcomes. So am I.

Perhaps we need to look at and address the root cause of the supposed need for the massive tax take at various levels.
On 10 September 2014 at 9:56 am bestadviser said:
My concern with CGT, exemptions for GST etc is that no one seems to consider the massive administration requirements and cost, all of which is borne by taxpayers and businesses and none of which is productive, it does not make NZ wealthier.

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