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Tax suggestions: 'I sigh deeply'

New Zealand's financial services world has responded with scepticism to proposals from the Tax Working Group, including a capital gains tax.

Friday, February 22nd 2019, 6:00AM 1 Comment

Anthony Edmonds

The group presented its final report on Thursday.

Some of the key changes proposed were:

  • A capital gains tax on all investment assets, except the family home. This would be charged as gains were realised, except for managed funds, where capital gains tax on Australasian shares would be charged on an accrual basis.
  • Increasing the amount of income that can be earnt on the 10.5% tax rate to $20,000 or $22,500 - or to $30,000 if the next tax rate was increased to 21% from 17.5%.
  • Reducing the KiwiSaver PIE tax rate for low-income earners by five percentage points.
  • Allowing earners on up to $48,000 a year a refund of the tax paid on their employer's KiwiSaver contributions. A refund on a sliding scale for those earning between $48,000 and $70,000.
  • Increasing the member tax credit for KiwiSaver from 50c in every $1 saved to 75c, still to a maximum $520.

Finance Minister Grant Robertson and Revenue Minister Stuart Nash said the Government was not bound to accept all the recommendations it put forward. There were options to accept some, and/or to phase or sequence aspects of the packages proposed by the group. Both Ministers said it was highly unlikely all recommendations would need to be implemented.

“We will seek technical advice on addressing the unfair and unbalanced elements identified by the TWG and make further announcements in April on any measures to enhance the fairness and integrity of the tax system,” Nash said.

“Our aim is to ensure the system is fair for families and businesses and that it offers balance across the wider economy,” Robertson said.

InvestNow founder Anthony Edmonds said the proposals 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,” he said.

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

Financial Advice New Zealand also urged caution.

“We of course support a progressive tax system that reduces economic inequalities. We welcome the recommendation that taxes on KiwiSaver be reduced – as a pivotal saving tool for New Zealanders, we need to do all possible to nurture growth in KiwiSaver participation," said chief executive Katrina Shanks.

“However, there are concerns regarding the capital gains Ttx (CGT) recommendations made by the Tax Working Group: many middle-income New Zealanders have worked hard for their financial security through property investment and business ownership. Obviously there needs to be more work performed in areas such as the setting of the CGT as the individual’s marginal income-tax rate.

“If adopted, the CGT will have a significant impact on a broad spectrum of the middle New Zealand: farmers, builders, mum and dad property investors, business owners and many more. Seeking financial advice is important, particularly should the proposed CGT changes be adopted. Our recommendation to any who are concerned would be to seek financial advice before making any potentially rash decisions.”

NZX chief executive Mark Peterson said it did not support a capital gains tax on shares because it would discourage investment in New Zealand businesses and stunt the growth of capital markets.

"New Zealanders are already taxed on income used to acquire shares – and being taxed twice would be unfair.  NZX is also concerned about the fairness of the Tax Working Group’s recommendations, and the different tax treatment proposed for direct investment compared to managed funds and KiwiSaver, which if implemented, would narrow participation in the New Zealand market.

"NZX also does not want to see tax settings which would create preferences for offshore investment.  A strongly performing and efficient capital market requires the broadest possible participation from a wide range of investors. Our capital market is a significant part of New Zealand’s economy, which needs to keep growing. The recommendations outlined today are not fair on New Zealand businesses and may pose risk to economic growth."

Retirement policy commentator Michael Littlewood was also unimpressed. "More fact-free recommendations from those who should know better...Mind you, KiwiSaver was Cullen’s creation and hopefully this will be the last roll of the dice from him; his last chance to tell New Zealanders what he thinks they should be doing.

"If we add all the proposals that the TWG mentioned that will cost other taxpayers $6.1 billion over five years or $1.2b a year.  And for what? I just sigh deeply."

Tags: Anthony Edmonds Financial Advice New Zealand NZX tax tax working group

« QSM on hold for now[The Wrap] A tax tidbit; time to support CFPs and CLUs »

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Comments from our readers

On 25 February 2019 at 1:52 pm Tash said:
Here is my 2c worth, simply because I need to vent my frustration with all the BS:
1. we do not have a current capital gains tax. The TWG recommendations on CGT is not an extension of "CGT" under the 'brightline' test. The bright line test is simply a mechanism to determine that a property has been bought for the purposes of resale and is therefore 'stock for resale'. Any resulting capital gain (profit) on sale is 'income' under the income tax act and taxed as such. It is not capital gains tax!

2. 'Income' and 'capital' are well defined and long established concepts. think tree and fruit differential. The new notion of 'capital income', (insofar as it relates to 'capital gains' not income earned from capital or fruit (which is taxed as income)), is simply a smokescreen to fudge the issue and enable a spuruious argument about 'fairness'. It is nonsense and should be called out as such. If Government wants to tax capital gains then they can do so, but transparency and honesty demand they don't make it murky and opaque by spin.

3. No one seems to have criticised the lack of indexing for inflation under the CGT proposals. The failure of a CGT to take inflation into account will destroy wealth over time and can simply not be justified as fair or reasonable.

4. One last thing, the wealthy (whoever they are) are not the enemy. Most pay more than their fair share of tax but they also create most of the wealth that we all need and without them NZ would be very poor. Chase away all the wealthy and all of us will be very poor.

You can't multiply by dividing!

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