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Capital gains tax on assets 'fairer'

Investors holding shares in New Zealand and Australian companies would be captured by changes proposed by the Tax Working Group today.

Thursday, February 21st 2019, 1:19PM 3 Comments

The Tax Working Group, which was set up to provide the Government with guidance on the future of the New Zealand tax system, has provided its final report.

It proposed implementing a tax on capital gains from investments including all land and buildings except the family home, business assets, intangible property, and shares.

Three members of the group had argued that it should only apply to residential property investment.

The tax would be applied at the taxpayer's marginal tax rate. Gains would be calculated from the day the tax policy was introduced.

It would mean that investors who bought and sold domestic shares would have to pay up to 33 per cent of the gains made when they were sold.

But the group says, for managed funds, the taxation should be on an accrual basis, with a discount to recognise the time value of money.

"This is different from the treatment proposed for directly held Australasian shares but fits better with the systems required to comply with the existing PIE tax rules. The accrual method is the same as the current CV method under the FIF regime," the report notes.

Group chairman Michael Cullen said a change was needed to improve fairness.

“New Zealanders earning just salary and wages are taxed on their full income but we have several situations where you can earn income from gains on assets and not be taxed at all."

The group acknowledged that, if capital gains were taxed in the same way as other income, capital losses should also be treated the same. That's particularly an issue for equities investors.

It said ringfencing would apply to portfolio investments in listed shares, so losses from one investment could be offset on gains on another.

Anthony Edmonds, InvestNow founder, said the recommendations would add cost, complexity and confusion to New Zealand’s relatively efficient managed funds market.

“For example, the TWG’s plan to increase tax on New Zealand shares by applying CGT while leaving the fair dividend rate (FDR) tax for offshore shares unchanged would naturally drag capital offshore at the expense of local assets – at a time when New Zealand needs to fund major infrastructure projects,” Edmonds said. “In trying to discourage people from investing in residential property, the TWG has created a tax disincentive for Kiwi shares, which can only distort investment allocation decisions."

He said the TWG recommendation to tax unrealised capital gains on PIE funds marked a return to the ‘bad old days’ when Kiwis paid more tax on managed funds than direct share investments.

Edmonds said the only balancing factor could be the additional complexity that direct share investors might face as a result of the CGT proposal.

“Regardless of how you invest, the TWG’s CGT proposal adds to complexity and increases the amount of tax you will pay on your savings.”

He said one positive proposal was the suggestion New Zealand should ditch the foreign investment fund (FIF) rules that allow individual investors to game the system by switching between FDR and comparative value (CV) accounting for their offshore equities holdings.

“Giving individual investors the option to switch between FDR and CV accounting each year depending on which method will result in less tax is a clear risk to government revenue,” he said. “Importantly, PIE funds are required by law to use the FDR approach to levy tax on offshore equities. 

“It’s good to see the TWG has called on the government to consider shutting down this loophole – but it should have been a formal recommendation.”

To offset the capital gains tax, the group is recommending income tax cuts of between $420 and $595 a year for most taxpayers.

It also wants to help lower-income people save for retirement.

It proposed refunding tax on employer superannuation contributions for KiwiSaver members earning up to $48,000. It would then be clawed back for those earning between $48,000 and $70,000 so those earning $70,000 and more would receive no benefit.

The group also recommended increasing the member tax credit to 75c per $1 invested - still up to $520 a year, and reducing the lower PIE tax rates for KiwiSaver funds by five percentage points each.

It did not favour applying GST to explicit fees for financial services and said the existing rules on foreign shares taxed under the fair dividend rate should remain the same.

Peter Neilson, former Financial Services Council chief executive, said those improvements would help low and middle-income New Zealanders saving in KiwiSaver.

"The package as a whole does reduce some of the tax bias which currently favours saving for retirement by investing in rental properties rather than KiwiSaver."

Edmonds said the proposals to impose different tax rates for KiwiSaver and standard PIEs would require investment managers and fund administrators to build complex and costly new systems to accommodate the two-tiered taxation regime.

“And that’s complicated further by the TWG idea to introduce another multi-tiered incentive with the employer superannuation contribution tax (ECCT) for those who earn under $48,000 per year set to be scrapped,” he said. “Undoubtedly, this proposal creates some very tricky administrative problems for providers – as well as new ‘border’ issues for the IRD to police as many New Zealanders will manage their tax affairs around these types of incentives.”

 

Tags: equities tax tax working group

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Comments from our readers

On 21 February 2019 at 2:28 pm Pragmatic said:
More rubbish announcements by one of the 152 working groups that have cost around $170 million dollars, that will never see the light of day. The government’s pursuit of wealth redistribution (from those who have earned it to those who haven’t) is a political grenade that will no doubt force a reaction at the next polls.

What next: centralizing the nz education system to reward non performing schools at the expense of performing schools? Oh wait - that’s the findings from another collection of morons fronting another working group...
On 22 February 2019 at 9:46 am Dirty Harry said:
I would love to see what Cullen's definition of "fairness" actually looks like.
Dictionary.com says:
noun
the state, condition, or quality of being fair, or free from bias or injustice; evenhandedness:

If you are a farmer, business owner, property investor or fund manager you would be thinking the TWG's recommendations are none of those things.
On 25 February 2019 at 2:00 pm Tash said:
Fairness means those that don't get the same as those that do.

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