Capital Gains Tax on Investment Portfolios

[Mr_Market]

http://www.taxpolicy.ird.govt.nz/publications/index.php?catid=2

Your interpretation/comments with regard to an individual investing in shares overseas would be appreciated.

[CJ]

Take a look at this for analysis from a Big Four accounting firm:

http://www.pwc.com/Extweb/pwcpublications.nsf/docid/31BEBABF93F2C3AECA25702D00816513

[Halebop]

A useful topic Mr Market although I expect most would be bored to death by it without realising the dire consequences it might raise. I've only read a third of the document but could highlight some issues from that:

The basic assumption in Chapter One (Section 1.2) that the current system distorts investments and the tax base. Dare I state the obvious that any system of tax distorts investments and the tax base? Any solution involving payment of tax will do the same.

Later in section 1.10 they state the unintended consequence of the current system is that people invest directly overseas for tax purposes. This is bollocks. I invest overseas for a broader exposure to industry groups and because the NZX often delivers an inferior product (albeit they have improved in the last 2+ years). Tax has nothing to do with where I invest. Tax affects structure, not destination. Investing for tax purposes is for stupid people. I do however structure my investments for <s>tax purposes</s> ehem, <s>avoiding creditor claims</s> er, estate planning purposes.

This leads to Chapter 2 where they concede New Zealand does not have the power to tax earnings in grey list countries (2.11). Well after any change is implemented, they still won't have that power. All they will achieve is ensuring my investments or income are not repatriated any time soon. All they will achieve is that I will spend more on accountants and advice to maintain the status quo. Is this because I'm a serial tax dodger? No. I pay my full share as both the law and the intent of the law allows. I don't however fancy the idea of paying tax on unrealised earnings. Its a stupid system. It assumes capital gains are some sort of "predictable" income. If implemented on me it would of course skew my investment decisions, ultimately leaving me poorer and more exposed to the thin ranks of industry groupings available to New Zealand investors in a poorly served market. (And I'd ask the question what incentive to improve service and infrastructure would a stock exchange have if handed such a boon for business?)

The system is targeted to increase investment in New Zealand. This would probably happen. How will increasing capital available to MHI for example benefit New Zealand? That just means more Jewellery stores in new markets like Canada, the USA or England and more administration staff in their Brisbane Head Office. They talked of not being in control of tax bases in foreign juristictions. Do they think they can control where Michael Hill opens its next store? Whats the consequence then? Michael Hill restructures and becomes a "proper" Australian company. Any New Zealand company with global aspirations will do the same. Hardly a strategy to build home grown multinationals.

So far it ranks lowly on my radar as far as concepts are concerned. I guess Act are trying to be centrist while their ratings implode but I suspect they'd poll better jumping on this one.

[Dough Boy]

Asked my bean counter the other day about this and got a shrug of the shoulders guess he has given up ever expecting this to ever happen?

As for taxation, I am in Hong Kong and it is brillant. All interest and dividends are tax free for individuals end of matter as the company has already paid tax! Oh so simple! No imputation credits and blah blah and so on. Simple! And tax office still gets its tax from companies private or public. So as an individual can hold millions of shares and only need to declare salary.

[Tinker]

Re : the introduction of a capital gains tax on ordinary New Zealanders.

I have now read the discussion document. A seriously flawed line of arguement in my opinion and one I will be submitting on.

If one looks at tables 5.15 and 5.17 of the attached
http://www.taxpolicy.ird.govt.nz/publications/files/html/invincome/c5.html
then the intention of the tax is to lower Australian, for example, investment returns by 33% to investors by central government taking that money from individual investors and, I presume, for central government to provide greater National wealth by using the investors money in a more efficient manner than the individual can. Otherwise the taxed or untaxed options have no impact on the total return to NZ if one assumes investment patterns don't change.

Clearly it is an attempt to increase tax revenue via a capital gains tax. This will lower NZs GDP. Tax payer funded civil servants have a woefull history of trying to generate greater returns/wealth than individual investors. I see no reason why the present bunch will be any better.

If the intention is to drive investors to invest in only NZ companies then they will find that the already lamentable 20% lower return one gets from NZ investments will decrease further as more money chases less indeas. How many Microsofts do you think will spring up in NZ regardless of how much seed money they get?

There is also all sorts of assumptions in the tables which any real life investor will know does not hold. 33% foreign tax, double taxation of dividends by two Governments, the tax NZ Government gets from O/S investors in NZ companies etc.

If central government is successful in implementing a capital gains tax on O/S investments then this will not be only area that they will try to tilt economic playing fields according to civil servants latest economic theory. You have been warned!

Cheers
Tinker

PS Mr Market - Any chance of changing the subject title to Introduction of Capital Gains Tax - Discussion Document. Might as well call a spade a spade!

[Wiremu]

Tinker,

I agree with halebop and you on this matter.

Can you tell us a bit more about the "civil servants latest economic theory".

That could be enlightening, and help understanding of a few other things going on.

[Tinker]

Hi Wiremu,

If you agree may I suggest you make a submission to Mr Cullen. Might take a little time but you will be doing a service to your country!

Civil servants latest economic theory .. no big conspiracy theory just my perception is that in the last few years there has been an increase in civil servants perceiving they can manage people lives economically better than they can by taking their money and spending it, usually in a manner which the individual would never in their wildest dreams imagine would add benefit to them and theirs or society.

Plus, on a lighter note, have you seen the example of how to calculate the new tax in the discussion document? If that doesn't drive one to drink it will at least lower the collective IQ of NZ investors! What a b*****and bizarre method of calculating anything! Still at least its consistent with the high level of intellectual thought expended in this whole tax grab exercise I suppose:D

Cheers
Tinker

[Wiremu]

Tinker,

Oh, the more or less hidden Labour Party approach is seeping through the civil service.

Wish we had a strong right leaning party to counter balance the worst excesses, but Act has lost the plot in recent years and is busy digging its grave at present.

[Mr_Market]

Haven't seen any commment from the National party on this yet. They will definately get my vote if they were to discount any possibilty of a capital gains tax on personal investment portfolios.

[Bobby_Fischer]

There already is a capital gains tax on personal investment portfolios - current FIF (*&%^$#@) regime under CV method is exactly that for non-grey list countries. At least the new proposal smoothes out the impost - right now investors in non-grey list countries get hit with tax on 100% of the gain in market value in the current tax year, regardless of cashflow from their investment.

[Mr_Market]

Then to create an equitable system why not drop the capital gains tax on the non-grey list countries? But of course Labour won't do that as they won't increase their own income, which is what this whole 'discussion document' is really about.

Assume I own a share of a company in a foreign country. My earnings on that share have been taxed by the foreign government. Our own government cannot claim that I have paid no tax. If they wish to have a share in my overseas success then they must come to an agreement with the foreign government to share the tax I have generated.

[Tinker]

Hey Mr Market,

Cheers for changing the title.

Might as well get the syntax right as if they are successful with this in future we can re-use the title by just changing the last two words. Might as well keep the theft orderly now [^].

Cheers
Tinker

[Bobby_Fischer]

Yes. We want the media to pick this up and run with it: "Read all about it, Labour Proposes new Capital Gains Tax"! We know the press trawl this site for ideas, don't we? Labour are now in near panic over the polls and hence the proposed "rural trespassers permitted act" has been "parked". With Joe Public's new found sensitivity to overtaxation, this proposal could well be the next one to hit the buffers.

[Mr_Market]

Found some comments by John Key:

National Party Finance spokesman John Key says, “Michael Cullen’s new plan to tax the hard earned savings of New Zealanders is yet another blatant tax grab.”

“Labour is determined to walk all over New Zealanders who have invested offshore in shares. It is denying them the opportunity to maintain diversity in their investment portfolio and National will oppose it.

"It is yet another blow to those trying to save for their retirement,” says Mr Key.

He is commenting in the wake of Labour’s confirmation that it intends to introduce a capital gains tax on seven traditionally exempt countries, including Australia.

“At a time when we are supposed to be removing the barriers and working towards a single market with Australia, Labour is throwing up another roadblock.

“Dr Cullen has argued against this sort of tax for years. He has said he is opposed to the risk-free rate of return model because it is overly complex. Now he appears to be changing his tune.

“National is opposed to the overtaxation of savings and will not support this move,” says Mr Key.

[SEC]

The IRD discussion document addresses my concerns about taxing unrealised gains. Paragraphs 5.53 - 5.55 propose a 'modified comparative value with 6% volatility cap' to be used to calculate tax paid in any year. That means the most tax that can be paid on an unrealised gain is 6% in any year until the asset is disposed of.

Is this rule the same for assets in non grey list countries?

Another relevant paragraph is 6.26 which proposes the entry value for the asset on transition date ( 1 April 2007) is market value on the transition date, not the purchase value.

In light of Paragraph 6.26, active traders could theoretically hold foreign shares until 1 April 2007 then sell on the day and incur no CGT whereas if they sold on 31 March they incur CGT. Looks like a loophole that could be exploited.

Bah, who cares? I'll be living in Australia by then, enjoying many thousands worth of franking credits.

SEC

[Mr_Market]

Brian Fallow: Slippery slope to capital gains tax

29.06.05

The people who write our tax laws really need to make up their minds. Do they want a capital gains tax regime or not?

Yesterday's package of proposed reforms to the tax treatment of investment suggests that they do - and that they don't.

Capital gains tax on investment in NZ companies via actively managed funds is to be eliminated, as long urged by the savings industry and endorsed by Craig Stobo's review.

But that measure sugar-coats the bitter pill of a new capital gains tax on outbound portfolio investment into countries which are traditionally exempt and which receive about 70 per cent of such investment.

New Zealand is unusual in not having a capital gains tax.

In principle it is not clear why a person should be taxed if he increases his wealth through working, but not if he increases his wealth through owning a property or the right form of financial asset.

Some years ago then-Reserve Bank Governor Don Brash, appearing before Parliament's finance committee, made the case for a capital gains tax on investment properties.

The MPs shrank back in their chairs as if to distance themselves from this politically radioactive proposition.

But to broaden the tax base through capital gains in exchange for a lower tax rate on incomes and/or consumption is an arguable proposition.

Creeping, piecemeal moves towards more capital gains tax without any such trade-offs, on the other hand, are objectionable.

Where does it end?

In five years time will we hear the argument that it is distortionary and economically inefficient to have a capital gains tax on foreign equity investment but not the local kind, so we should extend it to the latter?

And then will we hear the argument (again) that it is wrong to tax capital gains on financial investment but not residential property?

It is a slippery slope.

[Mr_Market]

Change capital gains tax laws, experts warn
03 July 2005
By ROB STOCK

Small investors will suffer if the government's capital gains tax proposals make it into law unchanged, tax experts say.

The proposal, unveiled by Finance Minister Michael Cullen in May's Budget, puts a capital gains tax on overseas investments, including the $3 billion in Australian shares owned by Kiwi households in the likes of Westpac, ANZ and AMP.

Add to that a further $2.5b held by Kiwis in British and American shares and National's deputy leader, John Key, thinks it could become an election issue.

If National was voted in at the next election the proposal would be binned, he said, as would Dr Cullen's KiwiSaver scheme.

The capital gains tax proposal is part of a shake-up of taxation on investments here and overseas, but tax experts say the proposed rules would be too complex for the average investor.

John Shewan, of PriceWaterhouseCoopers, said many investors would fall foul of IRD penalties because they would not realise, for example, that an AMP shareholding listed on the NZX market was an overseas investment.

And even Treasury officials have admitted that the calculations investors would be required to do to ensure they paid enough tax would be tough.

Under the proposed tax rules, overseas investments would be taxed on 100% of their capital gains. Income from them is already taxed at the investor's marginal rate.

Each year, investors would have to calculate the gains made by their investments and pay tax on 6% of that figure, whether or not the investment produces income with which to pay that tax. That would mean pension funds, for example, would have to hold more in cash to meet tax liabilities, potentially reducing returns, said AXA managing director Ralph Stewart,

In years when investments drop in value, no tax would be levied.

Losses of up to 6% could be used to offset against income tax in such years. The rest would be stored until the investment was sold.

When an investment is sold, the losses or gains become immediately taxable.

There would be a $50,000 threshold under which overseas investments would not be taxed, but hit $50,001 and it is all taxed.

There are also no plans to index that minimum, which would not grow as people's investments did, said Mike Shaw, a tax partner at Deloittes.

Treasury officials say that would open debate on whether all similar tax thresholds should be indexed, though that is what Cullen promised to do with income tax from 2008.

However, there is no minimum threshold for investments held through a pension fund. That is because it would be easy to collect, Treasury said.

Shewan said there would be calls for change in three areas - raising the $50,000 threshold, exempting Australian assets, and taxing only 50% of capital gains.

Key said Cullen appeared hell-bent on discouraging Kiwis from diversifying overseas even though that was sensible for a small, isolated country.

And imposing a capital gains tax on Aussie shares as the two nations moved towards becoming a single market under closer economic relations, or CER, was difficult to understand.

Key said all the tax would achieve was to divert more cash into housing.

Other industry figures agreed, saying to do less would result in Kiwis having far too many of their eggs in the domestic basket.

Consultation on the plan continues until the end of September.

[SEC]

quote:Originally posted by Mr_Market

Key said all the tax would achieve was to divert more cash into housing.

Other industry figures agreed, saying to do less would result in Kiwis having far too many of their eggs in the domestic basket.


Bingo!

One of the main reasons NZers put their money overseas is the lack of suitable listed investments in NZ and the necessity to diversify. As a result, any money repatriated will most likely be put into property and inflate the housing bubble further.

SEC

[craic]

The reason for no capital gains tax here is because of the farming sector. Sons or daughters inheriting properties would be faced with huge taxes on the capital growth of a property over maybe thirty or forty years since it last changed hands. As a lobby, the farmers say tax this and you are out of power. The philosophy has extended from the basic rural to other sectors. Tax investors any more and you have less investors - less investors means less tax, even with the extra imposed. Small companies collapse for lack of capital.Who, on the NZX would you invest in if you had to pay capital gains tax? Certainly not half the companies that are listed now.

[Arthur]

Some good points made here
http://www.goodreturns.co.nz/article/976490811.html

[stephen]

What got me was the idea that somehow the poor funds managers (of "collective" structures, no less) are disadvantaged. Boo-fckn-hoo.

The concern is "2.8 The review provided a detailed summary of the existing tax boundaries for investment. One of the main distortions identified for domestic investment was the inequity in tax treatment depending on whether an investor acquires an ownership interest in a New Zealand company directly or via an investment vehicle. In most cases, a direct investment in a New Zealand company will be treated as being held, for tax purposes, on capital account. This means that only dividends, not increases in share value, are taxable. On the other hand, if the investment were made via an investment manager, most investment vehicles would hold investments on revenue account, with tax payable on realised gains as well as on dividends. This is because such vehicles are usually in the business of dealing in shares, which requires trustees or fund managers to maintain equity amongst current and future investors. This revenue account treatment occurs despite the fact that the investor may hold the investment in the CIV on capital account. The fact that the investor's capital account status is generally not reflected when he or she invests through a fund manager creates a disincentive for individuals to invest domestically using financial intermediaries.... The tax barrier to investing via savings vehicles may disproportionately affect lower and middle-income savers as these groups are unlikely to have sufficient funds and expertise to invest directly in a diversified portfolio of assets. For them, savings and investment vehicles may be an important source of portfolio diversification, but one that is currently tax-disadvantaged."

This is frank bull****. Low-to-middle-income punters can always choose index funds. Furthermore, other funds can split into income funds and capital-growth orientated funds, living under the same tax law as I do as an individual. This proposal isn't levelling the playing field, it's privileging private companies (the management firms) over the citizen (me).

We already know from overseas research that most actively managed funds perform worse than the market. Why on earth should the government encourage people to invest with them by penalising those who want to strike out on their own?

I'm preparing a submission on this. Since the audience is a Labour one, I'm emphasising the way this helps out the corporates at the expense of the little guy.

[Gertie]

Craic

Capital Gains tax was imposed on farmers in the form of death duties up until about 1981 (ish) - it wiped a few out along the way.

[Tinker]

Have also posted on Investment Strategies board.

Check out what central govt is doing with your money to make your country a better place.

Guaranteed to increase the size of the national pie!

Cheers
Tinker
http://www.goodreturns.co.nz/article/976490811.html

[rmbbrave]

Brian Fallow: Tax change not so dark as it's painted





21.07.05


By Brian Fallow


Eyes narrow and lips curl at the very mention of a capital gains tax.

Let's put that phrase to one side for the moment.

Is the Government's proposed overhaul of the tax treatment of portfolio investment a good deal for investors?

On the face of it, collectively it must be, because the Government expects to lose something like $50 million a year in revenue. That is money left in investors' pockets.

But inevitably, in a suite of proposals designed to reduce the distortions and anomalies in the existing regime, there are losers as well as winners.

The area has become a tangled mass of complexity and inconsistency, with different rules depending on whether the investment is direct or through an intermediary, active or passive, in New Zealand or offshore and, if offshore, in which country.

Under the new regime people who invest in New Zealand companies via managed funds rather than by holding the shares directly or through passive, "tracker" funds, will no longer have their returns eroded by a capital gains tax.

If they invest in foreign companies by way of managed funds they will still be subject to a capital gains tax as they are now, the only difference being that they will be taxed as the gains accrue and not when they are realised by the fund selling the shares. In practice, fund managers turn over their investments sufficiently often for that not to make a lot of difference to the tax lability.

The people who miss out under the proposed changes are individuals who invest directly, or through passive funds, in the seven "grey list"countries: Australia, Britain, Canada, Germany, Japan, Norway and the United States.

At present they pay New Zealand tax only on the dividends they receive.

Under the proposed new regime they will be taxed on the increase in the value of the shares as well.

The new regime achieves neutrality in the treatment of offshore portfolio investment by imposing on all of it the toughest rules under the existing regime.

But is the proposed regime unduly harsh?

And will it, as critics claim, distort investment decisions and "ghettoise" investors' money in New Zealand's rather small market?

You might argue that New Zealand doesn't need a capital gains tax on financial assets because the tax authorities are really, really good at getting their pound of flesh at the company level.

And what they don't get at the company level they get when profits are distributed.

While the company tax take is high by international standards, that is offset by the fact that dividends typically come with credits for the shareholder's share of the company tax paid.

And, unusually, there is no capital gains tax on the share price rise (except when intermediated through actively-managed funds, and that, as we have seen, is due for the chop).

Offshore, it is a different story, or rather a whole lot of different stories.

But broadly speaking, if the investor is getting off lightly at the company tax level, the extra return will be pushing up his dividends or (more likely) the share price to reflect higher levels of retained earnings.

That in brief is the case for taxing distributions and capital gains - to sweep up, if you like, the tax foregone at the level of the underlying business.

On this line of argument the new rules for foreign investment are no harsher than those for the domestic kind, merely different.

But what if the investor is not getting off lightly at the company tax level? Then it is double taxation.

The grey list is, in effect, a list of countries exempted from the tough foreign investment fund regime which was drawn up in the wake of Winebox-like rorts involving tax havens.

The assumption was that the countries on the list taxed underlying businesses at a similar rate to New Zealand and that it was reasonable therefore to treat investors putting money into those countries roughly the same as those investing at ho

[pimpit]

I heard on the news 10% of New Zealanders own shares. I am not sure what % of that own overseas shares. So this new capital gain tax will not affect many people.

So the question is will enough people not vote labour on this issue?

It all seems like a scam to make money for fund managers as it will be to complicated for a lot of investors.

[Gryffyn]

Actually 20% of kiwis have shares but amounts and locations are harder to quantify.

[Mr_Market]

http://www.nzherald.co.nz/index.cfm?c_id=466&ObjectID=10337375

Brent Sheather: New tax has savings industry under threat

25.07.05

It is a more than little ironic that a Labour Government, which bravely floated the New Zealand dollar in 1985, thereby permitting New Zealanders to invest overseas, should now be effectively legislating against the practice.

Make no mistake - the proposed capital gains tax on overseas investments will, if enacted, fundamentally change the nature of the savings industry - for the worse. Returns will be lower, risks will be higher and history may well record Michael Cullen's legacy alongside that of arch-market meddler Sir Robert Muldoon.

Don't count on Mum and Dad or their advisers seeing this proposal for what it is and doing the right thing: New Zealanders have a long history of letting silly tax laws push them into sillier-still investments.

Goodness knows how much capital was wasted on ill-conceived horse and forestry investments in the 1980s. This capital gains tax will be easily and popularly avoided. We have been given two years in which to get our affairs in order so Mum and Dad will likely forget the standard investment theory that says one should diversify far and wide, forget relative yields and forget diversifying by currency.

It will be just a matter of picking the low on the exchange rate, bringing the funds home and finding a reasonably priced two-bedroom apartment in Auckland to reinvest in.

So what prompted Cullen to introduce such bias to investment decisions? The discussion document gives the ridiculous example of a hypothetical New Zealand investor who bought Dell shares 10 years ago. This lucky person has apparently enjoyed a 50-fold increase in his/her wealth without paying any New Zealand tax. It's a great story, but does this person exist anywhere but in the minds of Cullen's advisers? Hands up all those investors who bought Dell shares 10 years ago? My guess is that you could get all these long-term local Dell shareholders into the back seat of a small Japanese car.

Anecdotal evidence suggests that increasingly, "overseas" for most Mum and Dad investors is Australian shares such as Westpac, BHP, ANZ.

Unlike Dell, stocks such as Westpac pay a decent dividend, thus producing a meaningful income stream, which can be taxed.

Westpac shares yield about 6 per cent, which means that the IRD is getting as much tax revenue from $1000 of Westpac as it is from $1000 in a bank deposit.

No big avoidance deal there - in fact, Westpac has increased its dividend by about 15 per cent per annum over the last 10 years.

The IRD, and thus New Zealand, benefit from the growth of the Australian economy, and incidentally diversify their own earnings stream.

The good news is, of course, that the tax changes are only proposed and there is an election looming.

Our best hope is that Cullen will realise the magnitude of the error he is proposing and scrap the plan or, failing that, New Zealanders will realise the folly of the proposal and scrap the Government.

What is perhaps of more concern is that Cullen's advisers would even let such a silly proposal out into the public arena. What else might they dream up to disrupt rational decision-making - car-less days, or perhaps a price freeze. Little wonder the New Zealand dollar has started to fall.

So, apart from a weaker dollar and the possibility of a change of Government, what are the implications of the proposed capital gains tax for Mum and Dad, retired in Mt Maunganui?

Whichever way you look at it, lower prospective returns from overseas growth assets imply higher weightings back home for all but the ultra-wealthy who can afford to take a truly low-risk and long-term view. To calculate the impact of the proposed capital gains tax on Mum and Dad portfolios, we need to estimate the prospective capital growth of overseas shares.

Economics tells us that the return for shares is equal to the current dividend plus the rate at which the dividends will grow in the future.

For most investors, di

[stephen]

There's still time to get your submission in folks. Don't forget to stress that managed funds on average underperform, so that it is perverse to favour them over index funds.

[bigbear]

The most amusing aspect to me (and rest assured I find the proposal anything but amusing) is that the very same Dr Cullen was recently (last week I think) addressing a Property Institute conference where he once again referred to his desire to see NZ'ers invest more in shares rather than property. Does anyone apart from Cullengrad belive that this mad proposal would do anything else but divert investment from offshore shares back into NZ property?? Doesn't really compute with stated desire to increase savings and investment. Heres hoping September 17th is the end of such folly.

[stephen]

Have National disavowed this policy? Will they scrap it if elected?

[AbelTasman]

Stephen - yes - National have disavowed this policy - the National finance spokesman has said in a press release that the policy is cr*p and National will not have a bar of it - he gave some very good reasons too - he said a good portfolio will be deversified overseas and that it was not in the spirit of CER - he said the policy direction should make it better to invest in Aust rather then worse (he specifically mentioned improving the ability to cliam Aust franking/imputation credits)