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Change tax regime for KiwiSaver, share trading - capital markets review

KiwiSaver contributions should not be taxed up front but only when the saver withdraws funds, all direct share investments should be taxed as if they were portfolio investment entities and trading in shares should be tax exempt.

Monday, September 9th 2019, 12:17PM 3 Comments

by BusinessDesk

These are among the 42 recommendations of the capital markets revival plan proposed by Martin Stearne’s steering committee.

He says some of the recommendations are focused on encouraging more New Zealanders to become engaged investors.

“Many of the recommendations are also designed to create larger pools of capital for funding New Zealand enterprises, including infrastructure, via public or private markets,” Stearne says.

“Additionally, the recommendations recognise the growing role of private markets and therefore seeks to provide greater access to them for more New Zealanders.”

The committee is recommending simplified disclosure requirements for initial public offerings and scrapping the need for such offers to contain financial forecasts.

Its report notes that other major jurisdictions, including the United States and Britain, don’t require such prospective financial information.

It wants a review of the current continuous disclosure liability settings and a centralised process for complying with anti-money laundering laws.

It also wants listed companies to be exempt from the need Overseas Investment Office approval for transactions as long as no single offshore investor holds more than 25 percent of a company.

Other recommended changes to KiwiSaver are that the government scrap the current default provider status, currently enjoyed by eight providers, and replace it with one default fund setting. It also recommends reinstatement of a kickstart payment for members over 18 linked to an active choice of fund.

Even though more than 2.9 million New Zealanders now have KiwiSaver accounts, more than 389,000 have not made an active choice about their fund or fund provider and 1.2 million members were not making contributions as at March 2018.

It wants employer contributions to be mandatory, irrespective of whether the employee is contributing.

Other problems are that there has been little innovation from large or incumbent providers and there is not consistent disclosure of KiwiSaver fund holdings.

“We envisage KiwiSaver will become the main way individuals save for their retirement,” the report says.

“As these savings grow, it will be the largest pool of capital available for domestic investment.”

It is assuming that by 2030, KiwiSaver funds will hold up to $200 billion, making it important to improve outcomes.

The report also recommends allowing individuals to choose more than one KiwiSaver provider to allow for greater product innovation and competition.

A major problem with KiwiSaver funds is that managers focus almost solely on liquid assets and daily unit pricing because of the transferability by members between schemes.

It recommends that KiwiSaver funds should be encouraged to invest more in private equity and other unlisted investments.

The committee is also recommending an online financial capability and literacy course to be included in the National Certificate of Education Achievement system for high school students.

A major reason sparking the capital markets review has been the decline in IPOs. NZX’s number of listed equities has been bleeding for years – it was down to 138 at Dec. 31 from 159 a year earlier and 173 in December 2015.

The report says the lack of IPOs in New Zealand “is a more extreme version” of similar trends in other larger developed markets – the number of listed companies in countries such as Britain and the US has halved since the mid-1990s.

Another trend has been that IPOs have been used to sell existing shares rather than to raise capital for growth.

The review hails the “Mixed Ownership Model,” a recommendation of a similar review in 2009, as a great success, noting that the government’s cornerstone stakes in businesses such as Meridian Energy and Mercury NZ that listed on NZX as a result, are worth more than the whole value of these entities when they listed.

“New Zealand has a significant need for infrastructure – estimated at $129 billion over the coming 10 years,” the report says.

“Many submitters made the point that the capital markets can be enabled to play a greater supporting role in infrastructure investment if the relevant charging models are considered so that the infrastructure is investible,” it says.

“The MOM to date has clearly demonstrated to New Zealanders how such a model might benefit the country.”

Expanding on its tax proposals, the report says that New Zealand generally taxes savings more heavily than other OECD countries.

“Allowing pre-tax income to be contributed or sacrificed into KiwiSaver, as opposed to after-tax cash in hand, will likely provide a significant part of the impetus required to dramatically shift New Zealanders’ psyche and rational economic decision-making towards saving for their retirement,” it says.

It also wants investment earnings by KiwiSaver funds to be either tax-exempt or taxed at concessionary rates until the funds are withdrawn.

“Taxing KiwiSaver on withdrawal still ensures that tax arises on such savings and investments, but that it arises at the appropriate time and on an aspirational greater amount than that which the current savings path may project.”

The report notes that while the PIE regime exempts funds from having to pay tax on trading activity, individuals who make gains and losses when trading their listed shares are taxed up to 33 percent.

"We recommend that PIE taxation principles be extended to apply more broadly to all directly held listed New Zealand equities," it says.

"PIE rules themselves were originally intended to mimic individual share trading .... so taking any uncertainty away from the status of revenue versus capital account of direct individual investments in listed securities should simplify investing." It also recommends that any tax of such activity be capped at the corporate tax rate of 28 percent.

Tags: KiwiSaver tax

« Strong response expected to KiwiSaver default review: GovtAdvice rules created 'two-tier' market, working group says »

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Comments from our readers

On 10 September 2019 at 2:18 pm Elephant1 said:
There is a problem,now over 65s can join and some will be using it as an annuity product, the variables of a month to month investment will be difficult. What needs to be done is a change in the tax rates to reflect the inflation affect of the last seven years.
Secondly with $200b, of investments by 2030, the FMA is going to have to come to the decision we are going to need circa 1500 advisers just specialising in this product , and what medium term plan have they got to recruit and train them.
On 11 September 2019 at 4:51 pm Eyeinthesky said:
....I wonder how much money the FMA pumped into this, given it was apparently jointly sponsored by NZX/FMA.
On 12 September 2019 at 9:15 am smitty said:
Another recommendation to change the KiwiSaver rules and tax treatment. I am so amazed that this continues to be tinkered with, though in saying that, when you acknowledge how many people it can affect, you suddenly realise that you can have quite a bit of sway to your own personal political affiliation. We need to acknowledge that when it first started, both Employee and Employer contributions were credited tax free, then subsequent changes eroded this, to now be taxed. Think about it cynically, you now can tax ever increasing contributions that are in line with inflation, over a very long time horizon. Nothing makes tax coffers and subsequent government planning more appealing than having a consistent cash flow. Focus should be on changing the use of a Conservative strategy for a default investor. Change the default PIR rate for non-declared investors to their actual PIR rate. Rant over.

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