Personal Finance

  • FMA fast-tracks access to robo-advice at a rate slower than expected; Prioritises greater oversight at the expense of more red tape

    The Financial Markets Authority (FMA) is going ahead with its proposal to carve out an exemption in the law to enable firms to offer personalised financial advice online.

    However entities will have to wait a few months longer than expected before launching any robo-advice platforms, as they’ll have to get approval from the regulator first.

    The FMA, in a consultation document it gave the public a month to respond to in June, said it aimed to have a “class exemption” in place by late 2017.

    It proposed all entities that met the conditions of the exemption would be able to offer robo-advice.

    Yet the feedback on the consultation document has prompted the FMA to take a harder stance and require firms to apply to use the exemption.

    They will have to provide the FMA with good character declarations for directors and senior managers, as well as information showing they have the capability and competence to provide robo-advice.

    The FMA’s director of regulation, Liam Mason, says this will give the regulator more “visibility” over the market. It will also ensure the standards robo-advice providers have to meet are consistent with that of human advisers.

    In fact, the FMA says the exemption conditions will be designed so that robo-advice is provided in a manner that’s consistent with Authorised Financial Adviser requirements. AFAs are the most qualified type of adviser.

    “The exemption conditions and our ability to monitor providers will help us to manage risks and ensure consumer protection safeguards are in place,” Mason says.

    A matter of timing and commercial viability  

    The downside to increased oversight is increased complexity.

    The FMA will have to go through another consultation process in November to draft the exemption notice and firm up what the application process will look like.

    This means the exemption is only expected to be in place by early next year.

    From there, Mason expects the FMA to take between one and three months to assess an application. It takes a similar amount of time to licence a human adviser.  

    Mason says the whole point behind the exemption is to give people access to digital advice as soon as possible, so the regulator will do everything it can to make this a “smooth and swift” process.

    Nonetheless, firms will have to weigh up how commercially viable it is to apply to use the exemption next year, when the law set to replace the Financial Advisers Act and deal with robo-advice specifically, is expected to be passed in 2019.

    While under the National-led government the goal was for the Financial Services Legislation Amendment Bill to be passed in May 2019, there are no guarantees the new government will keep moving ahead with this plan.   

    Mason says the feedback the FMA has received indicates the industry strongly supports the introduction of an exemption, albeit only valid for a year for example.

    A number of the 49 submitters believe this would improve consumer access to advice, and say New Zealand can’t afford to fall further behind other jurisdictions in the sector.

    Exemption conditions can’t be aligned with new advice regime

    While some would rather sit tight and wait for a proper law reform, those who support the exemption would like its conditions to align with the new regime. They’re worried about incurring costs to comply with the exemption, only for these conditions to change when the new law is passed.

    After all, a successful exemption application will not automatically get them a licence under the new law.

    However with the new advice regime still being developed, the FMA says there’s no way it could align the conditions of the exemption with it.

    Pressed on the matter, Mason recognises the Government is trying to get things moving. It has started working on the regime’s “Code Standards”, so they’re set up before the legislation is passed. But this process only began in July, after the FMA’s first consultation document on the exemption was released in June.

    Scope of exemption broadened

    Furthermore, the FMA has decided to extend the list of products firms will be able to provide robo-advice on to include personal (Ie life) insurance and mortgages. The others include KiwiSaver schemes, managed funds, listed equity securities, government bonds, listed debt, general insurance, savings products and other credit contracts.

    Mason says the FMA believes there aren’t any additional risks providing advice on personal insurance and mortgages via a digital platform, compared to via a person. The risks are the same.

    Finally, the FMA has decided not to impose financial limits on robo-advice. For example, an individual client investment limit or a limit on the total investment amount of products.

    It recognises financial limits may be difficult to apply in practice or may have unintended consequences.

  • Free new tool launched by Auckland University that gives an economic estimate of the solar panel potential for most Auckland homes

    Content supplied by Auckland University

    The free online calculator factors in the unique “solar rooftop potential” of half a million Auckland buildings down to one square metre. This potential depends on such things as the roof’s slope and aspect, and shade from surrounding buildings and trees.

    A new tool is available to help Auckland households and businesses work out whether it makes financial sense to install solar panels on their roofs.

    “Solar generation is rapidly rising in New Zealand, with homes leading the trend. We wanted to offer an educational tool that is impartial and realistic to help people work out if solar is economic for their households or workplaces,” says Dr Kiti Suomalainen, a research fellow at the University of Auckland Business School’s Energy Centre.

    New Zealand’s total installed solar capacity rose fivefold over the three years to 2017, and Auckland Council has a goal of 970 MW installed capacity of solar photovoltaics by 2040.

    Dr Suomalainen devised the geographical 3D computer modelling behind the calculator. She used LiDAR data from Auckland Council, which is collected by planes emitting light pulses and timing how long it took for the reflected pulse to return to the plane, to construct a digital 3D model of the city with all its buildings and trees and other objects. With this, the solar radiation on individual rooftops could be calculated.

    The calculator allows users to zoom in on their rooftop for a colour-coded view of its solar energy potential, which highlights the best spots to place panels.

    You can also enter the size and quality solar panel you prefer, how much solar power you would use and how much you would sell back to the grid, and several other values. The calculator gives the total value (savings and revenues minus costs) of the installation over its lifetime. If it is positive, it’s a good investment.

    If you want to investigate further, Dr Suomalainen suggests visiting seanz.org.nz (Sustainable Electricity Association New Zealand) for a directory of accredited solar panel suppliers.

    “Self-consumption rate – the percentage of solar power that you use yourself, rather than sell back to the grid – is the main thing that will affect your economics,” she says.

    “If you’re at home all day you will probably use more power than someone who is at work or school most of the day. For every kilowatt-hour of solar power you use, you save about 27 cents. The buy-back rate at the moment is around 8 cents – so the more you use, the greater the overall value of your solar generation.”

    The calculator is now at a stage where users can test it and report any issues (e.g. mismatch of solar potential and underlying building on the map due to outdated building data). Dr Suomalainen welcomes feedback in order to make the tool as user-friendly and accurate as possible.

    Try out the calculator here.

  • BNZ borrowers save $480m in interest over 10 years through offset mortgages; Mortgage brokers say first home buyers with wealthy parents generally not among these

    First home buyers are tapping in to the ‘Bank of Mum and Dad’, but not through offset mortgages.

    Rather, the product which BNZ first launched in New Zealand in 2007, is mainly being used by home owners keen to keep a bit of capital aside to do renovations, invest elsewhere or keep as a rainy day fund.

    Offset mortgages enable borrowers to not pay interest on X amount of their floating loans, if they have X amount of savings they’re willing to not receive interest on.

    Borrowers can use both their savings, as well as those of others’ to write off their interest. In fact, they can connect numerous accounts to their mortgage, provided the accounts are all at the same bank.  

    So if a first home buyer has a $400,000 mortgage, and their parents have $100,000 sitting in a savings account with the same bank, the parents can forgo receiving interest payments on their savings, so their child doesn’t have to pay interest on $100,000 of their mortgage.

    Given mortgage rates are higher than savings rates, this can be an attractive option.   

    While a borrower can only offset the floating part of their mortgage, they can fix as much of their loan as they like.

    Borrowers will also be charged for offsetting ($10 a month in BNZ’s case).

    Offset mortgages are offered by BNZ, Kiwibank and Westpac.

    Offset mortgages being used by minority with decent chunks of spare cash

    BNZ’s retail and marketing director, Paul Carter, says the uptake of the product has been “pleasing”, with BNZ borrowers saving $480 million in interest since 2007.

    Looking at it another way, BNZ’s TotalMoney offset mortgage product makes up around half of its variable loan book.

    However mortgage brokers say there hasn’t been a great deal of interest in offset mortgages - especially not from first home buyers.

    Go2Guys’ Campbell Hastie and Your Home Loan’s Andrew Perry say the sorts of people interested in offset mortgages are those who aren’t throwing every cent into the purchase of a house.

    This might include those keen to keep cash aside to upgrade their home, buy another property, or use the money for a business operation.

    These observations aligns with Carter’s comments, as he notes those using TotalMoney generally have enough savings to offset half of their loans.  

    40% LVR rule means investors need their cash

    Hastie says borrowers keen to tie in their funds with their mortgage have two options; use an offset mortgage or revolving credit.  

    “One’s just a reverse of the other,” he says.

    “The difference though is psychological rather than financial, and it’s that you can see your money sitting there in its own bucket. If you need to see it, and you don’t want to see it mingled up in the mortgage, which is the revolving credit option, then offset is a great way of doing it.

    “Price, interest rate and fees wise, offset and revolving credit look identical.”

    However, Hastie recognises: “Most people are putting everything they’ve got into the purchase price. They’re not really hanging on to a lot for rainy day money. Either because they can’t, or because they see more sense in having a smaller mortgage.”

    With the introduction of the Reserve Bank’s loan-to-value ratio restrictions, which require investors to have 40% deposits, he says investors need all the money they can get.

    “I would say a lot of investors don’t actually have a lot of cash floating around, especially if they’ve made a purchase recently.”

    ‘Bank of Mum and Dad’ either gifts money or doesn’t help at all

    As for people getting on the property ladder for the first time, he says: “I definitely see instances of family helping first home buyers - definitely.”

    However this help is coming in the form of cash, rather than these sorts of arrangements.

    Parents who can, are telling these kids, ‘Here’s the money, take it and use it’.

    “I’ve never seen anyone want to have the ability to grab that cash back,” Hastie says.

    Perry is on a similar page. He says: “Offset mortgages don't really help first home buyers as any money offsetting the loan doesn't impact on the bank’s credit decision.

    “More common ways to help would be with… family guarantee type loans, gifted funds or via deed of acknowledgement of debt.”

    However Perry says: “The biggest factor in first home buyer loans would be KiwiSaver. This is something I see in 90% of applications.

    “In Auckland this generally means no Homestart Grant is available due to the house price caps, but the first home buyer withdrawal is still very useful - especially with the government tax contributions and employer contributions.

    “For a couple on $50,000 each, if they max out their KiwiSaver at 8% and get the 3% from employer on top, plus government contributions, they're at almost $13,000 a year without any additional savings of their own.

    “After four years they would have around $50,000, and some banks will lend to first home buyers in the current market with 5% deposits, so if you're looking at an [Auckland] entry level property between $600,000 and $700,000, then there are options out there.”

    Offset mortgage rates

    BNZ TotalMoney: 5.90%.

    Kiwibank Offset Mortgage: 5.80%.

    Westpac Choices Offset: 5.95%.

  • Peters says we need to consider if NZ needs a deposit guarantee scheme like in Australia, but won't be drawn on whether the NZ First policy has been discussed with National or Labour

    By Alex Tarrant

    Winston Peters wasn’t being drawn on immigration policy Wednesday, although he did bite softly when asked about his desire for a deposit guarantee scheme for majority New Zealand-owned banks.

    Meanwhile, he indicated that compromises were being found on certain policy areas not held in common between the negotiating parties. There had been “huge progress” finding out what was agreed on or not, what might still be negotiated, and where things might be taken in the future by cooperation.

    “So that, at the end, you may not have their decision or our decision as to policy, but a mutual decision,” Peters told media waiting for him as he returned from meeting National Wednesday morning.

    He said those talks went well, and that he was getting closer to making a decision. However, he wouldn’t talk further about the process we might see on Thursday, including whether the New Zealand First caucus would meet with the board at some point during the day to choose which deal to take.

    Peters on Tuesday evening said that while he might have made a decision on which way he might go by Thursday night, he was unlikely to make this public until after Thursday.

    Immigration

    One journalist tried asking about a specific policy area in a way that Peters might be drawn to comment on it: Would NZ First voters who supported the party due to its immigration stance be happy when the outcomes of government formation talks were known?

    Peters cottoned on to it, though. “Is this an attempt to entrap me? In a comment which I can’t make? Which I told you on day one I couldn’t make. I mean, can we try and cooperate here without me looking like I’m being evasive, because I’m not.” He was sworn to secrecy.

    Deposit guarantee scheme

    I tried with another area - NZ First’s policy for a deposit guarantee scheme for majority NZ-owned banks. In one of his first press releases after the election, he had warned of economic risks facing New Zealand due to hot international money flows into our banking system. Was this him pushing the need for depositor protection?

    “Well, the reality is that, if we end up needing that, it would be a very parlous situation,” he said. “But we still need to consider it. I’m not making this part of any discussion at the moment; all I’m saying is, any country, in the Western world in particular, would be having regard to the Australian - for example - deposit guarantee scheme, as opposed to the absence of one with Australian banks in New Zealand.”

    I asked him to clarify that they weren’t talking about the policy in the discussions. “No, I didn’t say that. I didn’t say I was, or I wasn’t,” he said. (He may have been trying to say earlier: 'I’m not saying that I'm making this part of any discussion at the moment'.)

    Waiting for the Greens?

    Then onto the Greens again. Was he concerned that the Greens would need to go back to their membership to ratify any deal with Labour and New Zealand First?

    “Look, you should know far more about the Greens than I do. But they don’t have to go back to their membership, they have to go back to about 170 members. Even I know that.”

    Here, he was referencing that the Greens in fact need agreement from 75% of delegates representing the party’s membership to ratify a deal – something which is expected to be possible over email or online rather than the party having to fly them all to one location.

    So, perhaps a positive note there for James Shaw – if you read that as Peters not being to fussed about the time the Greens might need to be allowed to say they support a Labour-NZ First deal.

  • Martien Lubberink welcomes the RBNZ Dashboard bank disclosure regime, sees lessons for other countries & expects even greater disclose as the RBNZ beds it in

    By Martien Lubberink*

    On the 21st of September, the Reserve Bank published the final decision on its Dashboard initiative for quarterly bank disclosures. For reasons unknown to me, the RBNZ did not post this decision on its news web-page, check here. However, it is a significant decision, one that should be welcomed.

    The Dashboard approach is meant to improve the timeliness, accessibility and comparability of bank disclosures. It does so by offering detailed prudential bank data centrally, electronically, timely, and comprehensively. This dovetails with the RBNZ's supervision philosophy, which relies on market discipline more than many other prudential supervisors.  

    This is awesome: a central repository, offering relevant data in a timely fashion.

    I like it that the Reserve Bank will host the Dashboard information on its website: one-stop shopping makes it easier to analyse New Zealand banks. The information will be timely as well: the Dashboard refreshes its content eight weeks after quarter-end. Also convenient is that the information will be in electronic form, I assume this will be data that can be read by Excel, Pyhton Pandas, or R.

    The RBNZ Dashboard will go live in May 2018, which is probably as early as reasonably possible.

    Good luck comparing banks elsewhere.

    The decision to go ahead with the Dashboard is significant, not only for New Zealand financial stability, but in particular for European bank regulators. They should take notice.

    The current state of EU bank disclosures is silly and needs improving. European bank regulators are largely free to decide how banks disclose prudential information. This then leads to patchwork, an investor's nightmare. It amazes me that there is no need to sustain this patchwork: all European banks use standardised reporting systems (Finrep, Corep) to share private prudential information with their supervisors. That information should be made public, like the Reserve Bank plans to do under the Dashboard regime. Alas. Instead, supervisors champion opacity. The ECB, for example, offers aggregate bank data via their impenetrable Statistical Data Warehouse, which hijacks your web-browser upon entry, so I won't share the relevant link.

    The Bank of England also publishes useless aggregated statistics, sourced from privately reported regulatory data, (i.e. Finrep, Corep).

    French supervisor ACP does a slightly better job. It offers detailed bank data on a dedicated website.  So far so good. Unfortunately, the data covers only the largest banks. Moreover, users can télécharge (download) zip-files that contain myriad of csv files - in French. I am afraid that ACP does not worry about the interests of retail investors or foreign investors.

    Very promising is the European Banking Authority, which for the n-th year promises to disclose bank-by-bank data (see the EBA's recent work-plan). I am sorry, but the EBA has been promising this for some time, but then realises it has no resources to deliver.

    Admitted, there are some okay-ish examples. The Central Bank of the Netherlands, for example, publishes a dashboard of sorts. Yay! However, the publication frequency is semi-annual, not quarterly. Neither does it look like the information is timely: the last update was on 30 June, reflecting year-end information of 2016. Further, the number of items is low compared to the Dashboard: 23 versus more than 65. There is only one column for Risk Weighted Exposures, whereas the RBNZ Dashboard will report 13 rows on this item.

    Maybe matters will change under CRD V, which updates the current EU bank rules. But I have this gut feel that EU bank regulators are happy with the status quo, which offers them private data - thus preventing the public from monitoring their banks (and their supervisors).

    Keep up the good work!

    Compared to what some other prudential supervisors offer, the RBNZ's Dashboard is meritorious for at least two reasons. Firstly, I am sure the Dashboard will contribute to financial stability and enable depositors and retail investors to better understand and co-supervise our banks, including the Reserve Bank.

    Secondly, once we all get the hang of it, there is very little to stop the Reserve Bank from asking more. More data items, and perhaps also disclosures at a higher frequency, eg. monthly, and allowing even more convenient access via an API for platform independence. Why not!

    Note, the U.S. has a more elaborate system than the RBNZ proposes with its Dashboard - see here, here, and here. I like this system, because the data can be read straight into research software, so yes, I am impatient … baby steps, baby steps.

    (The chart below comes from the RBNZ's final Dashboard policy paper).

    -----------------------------------------

    *Martien Lubberink is an Associate Professor at the School of Accounting and Commercial Law at Victoria University. He previously worked for the central bank of the Netherlands where he contributed to the development of new regulatory capital standards and regulatory capital disclosure standards for banks worldwide including Europe (Basel III and CRD IV respectively).

  • InvestNow buys RaboDirect's managed funds line, which was set up by InvestNow's managing director in 2006

    Wellington-based “fund supermarket”, InvestNow, has bought RaboDirect’s managed funds product line.  

    The acquisition will see RaboDirect customers offered the option of having their fund holdings transferred to the InvestNow platform.   

    InvestNow offers a similar service to RaboDirect; a platform through which New Zealand resident retail investors can invest as little as $250 in a range of funds.

    The difference is InvestNow offers a wider range of funds, including Smartshares ETFs and Vanguard funds, and doesn’t charge the fees RaboDirect does for facilitating the investment.

    Rabobank New Zealand CEO, Daryl Johnson, says the decision to no longer offer the managed funds product line was made to “simplify” the RaboDirect business model.

    “As a fundamental part of Rabobank’s overall business in New Zealand, RaboDirect will continue to play a key role in raising deposits for Rabobank to lend to our clients in the food and agribusiness sector,” he says.

    Johnson says InvestNow was a logical company for RaboDirect to partner with.

    In fact, InvestNow’s managing director, Mike Heath, set up RaboDirect’s platform as its general manager between 2005 and 2011.

    Launching in March, InvestNow has $100 million of funds under management. As at September 1, RaboDirect had just over $125 million.

    InvestNow founder, Anthony Edmonds, says the RaboDirect managed funds acquisition is a massive endorsement of the InvestNow direct-to-consumer fund service.

    “The fact InvestNow has attracted more than $100 million under management in less than eight months clearly shows the New Zealand market is ready for a modern direct online fund service,” he says.

    “RaboDirect pioneered the concept of direct managed fund sales in New Zealand and InvestNow is well-placed to take over what RaboDirect have developed given we share the same underlying products on the platform, as well as strong historical management links.”

    RaboDirect managed funds customers will have access to InvestNow benefits, including no entry fee on fund purchases (RaboDirect currently charges customers up to 0.75% on fund purchases), and an extensive range of funds to select from.

    The InvestNow platform is soon expected to include all of the 45 funds currently offered by RaboDirect, plus 16 more.

    InvestNow’s funds include those from AMP Capital, ANZ Investments, Devon, Fisher Funds, Harbour Asset Management, Hunter Investment Management, Mint Asset Management, Nikko Asset Management, Russell Investments, Salt Funds Management, Smartshares and Vanguard.

    The acquisition excludes the Cash Advantage Fund and Term Advantage Fund holdings of RaboDirect customers.

    Neither Rabobank nor InvestNow have disclosed the value of the acquisition. 

    For more on InvestNow, see this piece interest.co.nz did last month, comparing its offerings to that of RaboDirect and Sharesies.

  • Terry Baucher argues any political party wanting a fairer, more productive New Zealand needs to address the issue of the taxation of capital

    Is a capital gains tax ever possible?

    Earlier this week Gareth Vaughan asked me whether a New Zealand political party could ever sell the idea of a capital gains tax (CGT) to the public and if so, how?  Always up for a challenge, I believe the answer is yes.

    Firstly, a quick definition: we’re discussing a realisation-based CGT, i.e. the gains are determined when an asset is sold or otherwise disposed of. This is the “standard” CGT in use around the world. All assets would be revalued prior to implementation so any gains which have arisen prior to the start of a CGT would never be taxed.

    To begin with, it’s vitally important to recognise the scale of the challenge. As Bernard Hickey pointed out, Jacinda Arden’s “Captain’s Call” was effectively a $520 billion gamble.

    Viewed like this, Labour’s initial approach was a bit like Custer’s charge into the Little Big Horn, a bold cavalry raid relying on shock and awe to overwhelm the enemy before it can organise. Like Custer, Labour underestimated the scale of the opposition but unlike the hapless 7th Cavalry, managed to extract itself and is still in with a chance even if a bit battered by the experience. Jacinda Ardern and Grant Robertson will now appreciate that introducing a CGT will not be a swiftly won skirmish but full on trench warfare.

    Into the breach

    The arguments in favour of a CGT can be summarised as follows:

    • Raising taxes is not politically impossible;
    • We already tax a large number of capital gains;
    • Broadening the base of taxation to include capital gains is consistent with current policy settings;
    • Broadening the base would produce a fairer tax system and should enable tax rates to be lowered;
    • CGT would simplify the tax system; and
    • It could help address New Zealand’s poor productivity record.

    Let the difficulties argue for themselves

    In 1943, facing opposition to his proposal for floating harbours to be used in the D-Day landings, Winston Churchill growled “Don’t argue the matter. The difficulties will argue for themselves.” 

    What’s remarkable about the CGT debate is that proponents of a CGT regularly fall into the trap of arguing the difficulties. Even when the Labour Party ran on introducing a CGT in 2011 and 2014 it started from a circumscribed position of exempting the family home. 

    Opponents therefore didn’t even have to address the question of whether it was fair that someone owning a multimillion-dollar property and receiving non means-tested New Zealand Superannuation (hello Winston!), shouldn’t be taxed on any capital gains from the sale of their property.

    Taking so much off the table without question just puts those advocating change on the defensive. Better to follow Nelson’s last signal at Trafalgar and “engage the enemy more closely”. It’s going to be trench warfare so don’t surrender ground willingly. 

    The base line for a CGT should be to put everything, including the family home, up for debate. If a CGT was introduced my preference would be to give a generous exemption for the family home, maybe $250,000 per person as is the case in the United States. Remember gains arising prior to commencement will NOT be taxed.

    “But the politics”

    Recent history shows that parties can raise taxes and still win elections. In the last thirty years three New Zealand governments have either introduced or raised taxes and all were subsequently re-elected. David Lange’s Labour Government introduced GST, a completely new tax, in 1986. Helen Clark campaigned and won in 1999 with a promise to increase the top rate of income tax to 39%. Finally, in 2010, John Key’s National Government raised the rate of GST to 15%. All three governments were comfortably re-elected after their tax increases. Raising taxes or introducing a new tax is therefore not politically impossible.

    There is no CGT in New Zealand, there are no sheep on our farms

    New Zealand remains virtually unique among the OECD’s 35 nations in not having a CGT that is generally applicable regardless of intent. The principle behind taxing capital gains is not revolutionary.  As Inland Revenue advised then Minister of Revenue Todd McClay in February 2014:

    “Increases in asset values, just like regular income, increase a person’s net wealth and ability to consume. A capital gain is income…

    “There is no obvious reason why a person who derives $100,000 in interest income should be taxed differently to a person who derives $100,000 in capital gains.”

    In fact, we already tax a LOT of capital transactions. There are presently over thirty provisions within the Income Tax Act which tax capital gains. These rules were described as “an incoherent mix of taxation based on accruals, realisation, and imputed return” in a paper prepared by Leonard Burman and David White for the 2010 Tax Working Group (“the TWG”).

    Capital gains already taxable include the financial arrangements and foreign investment regimes, foreign superannuation scheme transfers and certain property transactions including the “bright-line” test introduced in 2015. 

    Against this backdrop the CGT argument really should be framed as “why aren’t we taxing X or Y?” 

    What’s in it for me? Broadening the base

    Following the example of the introduction of GST in 1986 and its 20% rate increase in 2010, any CGT introduced should be promoted as a revenue-neutral measure and accompanied by compensatory income tax and/or GST reductions. Such a step would be entirely consistent with the “broad base, low rate” approach to tax policy both Labour and National have supported for the past 30 years. 

    This is also the view of Treasury which in a September 2012 report stated;

    “Treasury continues to see merit in a general capital gains tax or a land tax as possible revenue-raising reforms, and considers that a capital gains tax offers the best way of improving allocative efficiency by reducing economic distortions caused by gaps in the tax base.”

    The debate on CGT has tended to paint its application as a loss for those affected. The better question is what is the opportunity cost of NOT taxing capital gains?

    Inland Revenue advised the TWG in 2010 that a comprehensive CGT including the family home could raise $9 billion annually. That was more than the projected $8.3 billion corporate income tax take for the June 2010 year, or just under 25% of the combined GST and individual income tax take of $36.1 billion. If the family home was excluded, the projected CGT revenue was $4.5 billion, still a substantial sum. Excluding the family home would come at a cost which should be made clear.

    Based on the available evidence (and unlike Australia, Canada, the UK and the US, Inland Revenue doesn’t release very detailed tax statistics), the evidence is that capital is under taxed especially relative to salary and wages. Furthermore, non-taxation of capital tends to favour the wealthy.

    A joint Treasury/Inland Revenue report prepared for the TWG in 2009 examined the composition of taxpayers paying tax on capital gains in Australia and the United States.

    In Australia, 1,148,440 taxpayers reported taxable gains for the year ended 30th June 2007. And 48.4% of all gains for the year was returned by the 90,202 taxpayers (7.8%) with taxable income in excess of $150,000. There were similar findings for US taxpayers.

    The report concluded “If New Zealand is similar, this would suggest that omitting to tax capital gains is likely to favour the rich.”

    A subsidy from the general taxpayer to property owners

    A further issue arises not just in the potentially higher income tax rates for taxpayers in general but also through the ability for negatively geared investors to offset their losses against other income.  This offset often results in substantial tax refunds. For example, according to information supplied to me by Inland Revenue, the rental losses reported by the top three income deciles for the year ended 31st March 2016 totalled $339 million (about 60% of the total losses for the year). At 33% that represents about $112 million in tax. This is effectively a subsidy from the general taxpayer to property owners.

    This leads on to the question whether it is fair that someone who may have enjoyed perhaps hundreds of thousands of dollars of tax refunds through negative gearing, also gets the capital gains on their investments tax free?  This is perhaps one of the biggest anomalies of the present system.  

    According to Statistics New Zealand, the number of New Zealanders living in their own home has fallen from a peak of 73.8% in the March 1991 quarter to 63.2% in the December 2016 quarter.

    Statistics New Zealand now estimates 33% of New Zealanders, over 1.5 million people, live in rental property. Increasingly, it seems the benefits of residential property are going to fewer people.  Does the present tax treatment of property effectively result in an unseen subsidy in the form of higher taxes paid by non-property owners? The trade-off proposed is that the revenue from a more comprehensive CGT could be used to lower income and/or GST rates for everyone. This is not being debated at the moment.

    Complicated compared with what?

    The Burman and White paper for the TWG acknowledged that a CGT would be "relatively challenging to administer" but then asked the question "compared to what?” Anyone arguing a CGT would be more complex than the financial arrangements and foreign investment fund regimes clearly hasn’t spent much time navigating these minefields of complexity. CGT should enable both regimes to be consigned to somewhere near the bottom of the Kermadec Trench.

    For many transactions, a realisation-based CGT would be conceptually clearer than the current law and therefore more comprehensible to the layperson. This is particularly true of land transactions, where tax advice is often little more than a variation of ‘It depends’. The introduction of the ‘bright-line test’ in 2015 highlighted how unsustainable the existing approach to taxing land transactions based on intent at the time of purchase had become.

    Critically, a CGT would also be more enforceable, as intent would no longer need to be determined. It would also be fairer: given the subjectivity of measuring ‘intent’, taxpayers in identical circumstances could currently finish up with differing tax bills. (What may be acceptable proof of intent to one Inland Revenue auditor may be insufficient for another.)

    What productivity growth?

    In any case how are the present rules really working out for us?  Ex-Reserve Bank economist Michael Reddell pointed out this week that New Zealand’s productivity has gone nowhere in the past five years, part of a near 70-year relative decline.

    What part has the present tax rules played in that decline? The Burman and White paper for the TWG raised this issue, arguing:

    “That is why geniuses who might otherwise do productive work have been drawn to financial engineering or into fields that can earn income in the form of capital gains rather than income. With such huge tax incentives, the investments that produce capital gains do not even have to be particularly productive. Thus, many resources invested in such underperforming assets may be wasted.

    Eliminating that waste would be good for productivity. It would also bolster support for the income tax. A tax system riddled with loopholes, where billionaires can pay lower average tax rates than their secretaries, invites disrespect and undermines voluntary compliance.”

    Apart from having a CGT, something else Australia, Canada, the UK and the US all have in common is superior productivity to New Zealand. This lends weight to Burman and White’s argument that the lack of a CGT may have resulted in lower productivity here. Maybe those opposed to CGT should answer that question when defending the present treatment.  (And Bill English, simply saying it’s not true about no productivity growth in the past five years doesn’t count).

    If not a capital gains tax, what?

    What might also emerge from a debate could be that CGT isn’t the answer, but maybe the alternative suggested by The Opportunities Party of a deemed rate of return on all productive assets would be worth pursuing. 

    Ponder this: a one percent levy on the $1.38 trillion net financial wealth currently held by households would yield $13.8 billion a year. To put that in context the Government expects to collect an estimated $20.6 billion in GST, and $34.3 billion in income tax from individuals in the year to 30 June 2018.  A levy should provide a substantial amount for redistribution to cushion the cashflow impact of an asset tax.

    A fairer, more comprehensible and productive tax system

    Whether it’s through a CGT or an asset tax, taxing capital more comprehensively would achieve the goal of a broad-base, low rate tax system. It should be sold on this basis and introduced alongside a potentially quite substantial reduction/re-alignment of income tax and GST.

    CGT is not without complexities but it would be far more comprehensible than the present “incoherent mix”. Eliminating the bias towards tax-free gains would mean a fairer tax system as Burman and White pointed out. It should also free up capital to be deployed more productively raising productivity and wages. That’s a lot of positives for those proposing change to deploy.

    Any party wanting a fairer, more productive New Zealand, and as far as I can tell, that’s all of them, needs to address the issue of the taxation of capital. Because whatever we’re doing now isn’t working.


    *Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »

    (Parts of this article are reproduced with permission from Chapter Five of Tax and Fairness, a book by Terry Baucher and Deborah Russell).

  • NZ Super Fund returns 20.7% in June year after costs and before tax. Now sits at $35 bln having added $5 bln. Pays $920 mln in tax

    The New Zealand Superannuation Fund has unveiled a strong June year performance.

     It returned 20.7% after costs and before New Zealand tax, swelling $5 billion to $35 billion.

    Established by the previous Labour Party-led government to help meet the rising cost of superannuation payments to retirees, the Super Fund began investing in September 2003 with about $2.4 billion. The National Party-led government stopped making contributions to the Super Fund in 2009, with the Government having tipped in about $12.34 billion of taxpayers' money to that point. 

    The Super Fund is one of New Zealand's biggest taxpayers having paid $920 million of tax in the year to June 2017. We discussed this, and other issues, with its CEO Adrian Orr in this 2015 video interview.

    Below is the NZ Super Fund's statement on its latest annual performance.

    NZ SUPER FUND ANNOUNCES 20.7% RETURN FOR 2016/17

    The NZ Super Fund has enjoyed one of its best annual performances yet, turning in a 20.7% (after costs, before NZ tax) return for the 12 months to 30 June 2017. It finished the year at $35 billion, up $5 billion on the year before.

    Chair Catherine Savage said: “The Fund is generating world class returns and creating significant wealth for New Zealanders on a sustained basis. It should not, however, be measured on its short-term returns. We are here to create long-term value for New Zealand taxpayers.  The Fund has now returned 10.2% p.a., more than double the cost to the Government of contributing to it,*  over a period of nearly 14 years.”

    The 20.7% annual result reflects a sustained rally in global equity markets, and resulted in the Fund paying a record high $1.2 billion in New Zealand income tax for the financial year.

    Ms Savage said the Fund’s active investment strategies had performed strongly during the year, adding value of 4.4% ($1.3 billion) over the Fund’s passive benchmark. “Over the long term we expect to beat the passive benchmark by 1% p.a., so this has been an excellent year.”

    She said the Guardians’ strategic tilting programme, in which it adjusts the Fund’s exposure to different asset classes; its significant investment in North Island forestry business Kaingaroa Timberlands; and the Guardians’ internally-managed credit mandates, were the key reasons the Fund beat the passive benchmark.

    Since inception in 2003, active investments by the Guardians have generated an extra $6.2 billion (1.4% p.a.), over what an entirely passive strategy would have done.

    Chief Executive Officer Adrian Orr said the Fund continued to be heavily weighted towards growth assets. “A long investment horizon and low need for liquidity give us some unique advantages in the investment marketplace both in New Zealand and overseas. Our active investment strategies and strong weighting towards growth assets exploit these advantages in a disciplined and cost-conscious way.”

    Fund volatility was within expected parameters and the amount of risk being taken was appropriate, he said.  Total risk at the Fund level, and active risk taken, had both been reduced over the year as markets continued to rally.  “The returns we have been achieving are above our long run expectations, and we are cautious about the outlook,” Mr Orr said.

    “As a long-term, contrarian investor the Fund has the ability to look through and profit from market cycles. While global growth prospects are currently quite encouraging, should markets drop we are well positioned to capitalise. The Fund’s expected returns over the long term (rolling 20 year periods) remain at around 8% p.a.”

    Fund ranks highly in CEM survey

    The latest CEM survey of international pension fund cost effectiveness ranks the NZ Super Fund highly, relative to a group of its peers, for net value add. CEM put the NZ Super Fund at the 100th percentile for net value add over four and five year periods. The NZ Super Fund also ranked well on cost measures, lower than the peer group average and trending down over time. The CEM survey, which is as at 31 December 2016, is available at https://www.nzsuperfund.co.nz/documents/cem-survey-2016.

    Summary Results as at 30 June 2017

    2016/17 Financial Year:

    • Total Fund returns: 20.71%
    • Estimated $ earned by active investment: $1.28b
    • Estimated $ earned relative to T-Bill return: $5.56b

    Since Inception (September 2003):

    • Total Fund returns: 10.22%
    • Estimated $ earned by active investment: $6.25b
    • Estimated $ earned relative to T-Bill return: $19.09b

    See our June 2017 Performance Report for more information.

    * As measured by Treasury Bill returns. All performance figures are after costs, before NZ tax.

  • The RBNZ eyes May launch for its bank dashboard disclosure regime with previously hostile banks now 'looking forward' to working with their regulator 'on the practical detail'

    *This article was published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.

  • Falling house prices shave $50.97 a week off mortgage payments for first home buyers in Auckland: Home Loan Affordability Report

    By Greg Ninness

    The prospect of owning their own home improved slightly for first home buyers in Northland, Auckland, the Waikato and Taranaki last month, but worsened for first home buyers in all other regions of the country.

    With mortgage interest rates remaining largely flat, the main drivers of changes in first home affordability have been movements in lower quartile selling prices, according to interest.co.nz’s Home Loan Affordability Report for August.

    It showed that the REINZ’s lower quartile selling price (the price point at which 25% of sales are below and 75% of sales are above) declined in Northland, Auckland, Waikato and Taranaki in August compared to July, but increased in all other regions of the country.

    In Auckland the lower quartile price dropped to $640,000 in August.

    That was the fifth consecutive monthly decline in the region’s lower quartile price since it peaked at $680,000 in March.

    The slide in Auckland’s lower quartile prices means it has now fallen below where it was 12 months ago, at $655,000 August 2016.

    That fall in prices is evident throughout the region, with lower quartile prices in August below their previous highs in all districts and below where they were 12 months ago in Central, South and  West Auckland, but still up compared to August last year in Rodney, the North Shore, Papakura and Franklin.

    While prices have been declining over the last few months, mortgage interest rates have been largely stable, with the average of the two year fixed rates offered by the major banks staying within the 4.82% - 4.84% range between February and August, up slightly from its record low of 4.35% in May last year but still well below its long term average.

    Separate Home Loan Affordability Reports are available for each of the following regions and cities (click to view).
    Northland Region
    Whangarei District
    Auckland Region
    Rodney District
    North Shore District
    Waitakere District
    Central Auckland District
    Manukau District
    Papakura District
    Franklin District
    Waikato Region
    Hamilton District
    Bay of Plenty Region
    Tauranga District
    Rotorua District
    Hawke's Bay Region
    Napier District
    Hastings District
    Gisborne District
    Taranaki Region
    New Plymouth District
    Manawatu/Whanganui Region
    Palmerston North District
    Whanganui District
    Wellington Region
    Masterton District
    Kapiti District
    Porirua District
    Hutt Valley District
    Wellington City
    Nelson/Marlborough Region
    Nelson City
    Canterbury Region
    Christchurch District
    Timaru District
    Otago Region
    Dunedin District
    Queenstown-Lakes District
    Southland Region
    Invercargill District
    All New Zealand

    The Home Loan affordability report estimates that this combination of falling prices and relatively stable interest rates would have reduced the mortgage payments on a lower quartile-priced for a typical first home buying couples in Auckland by $50.97 a week since the lower quartile price peaked in March.

    Unfortunately the drop in prices is still not enough for homes to be regarded as affordable for typical first home buyers in Auckland.

    As well as movements in interest rates and house prices, the Home Loan Affordability report also tracks movements in incomes, and calculates how much of their weekly take home pay a typical first home buying couple would need to set aside each week to make the mortgage payments on a lower quartile-priced home.

    Housing is considered affordable if the mortgage payments take up no more than 40% of their take home pay, and unaffordable when mortgage payments take up more than 40% of take home pay.

    The report estimates that when Auckland prices peaked in March, mortgage payments on a lower quartile-priced home would have taken up 46.1% of a typical first home buying couple’s take home pay, well into unaffordable territory.

    But affordability has steadily improved as prices have fallen, and in August the mortgage payments would have been eating up 42.6% of typical first home buyers’ take home pay.

    So although affordability has been improving in Auckland , house prices have quite a bit further to fall (and interest rates would have to remain low), before housing could be considered affordable in Auckland.

    Outside of Auckland, the only other place where housing is unaffordable is Queenstown, where first home buyers would have even more of a struggle buying their first home than they would in Auckland.

    That’s because lower quartile prices in Queenstown are even higher than they are in Auckland ($677,000 in August) while wages are lower ($1506.46 a week after tax for a typical first home buying couple in Queenstown, compared to $1612.82 in Auckland).

    That means a typical first home buying couple in Queenstown would need to set aside almost half (49%) of their net pay each week to service the mortgage on a lower quartile-priced home in the town.

    Fortunately housing remains well within affordable levels in all other parts of the country.

    In Wellington City, mortgage payments would only take up 27% of a typical first home buying couple’s take home pay, in Christchurch it would be 21.4% and in Dunedin 19.7%.

    You can receive all of our property articles automatically by subscribing to our free email Property Newsletter. This will deliver all of our property-related articles, including auction results and interest rate updates, directly to your in-box 3-5 times a week. We don't share your details with third parties and you can unsubscribe at any time. To subscribe just click on this link, scroll down to "Property email newsletter" and enter your email address.

     

     

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