Shareholders' group's CGT warning

Investing

Shareholders' Association concerned a capital gains tax would hit young people's KiwiSaver share investments

22nd Jul 11, 11:06am by Gareth Vaughan

<p> CGT warning: The Shareholders' Association has concerns about the capital gains tax proposed by Labour leader Phil Goff (right) and finance spokesman David Cunliffe (left).</p>

The Shareholders' Association says it's "very concerned" the Labour Party's proposed capital gains tax (CGT) would hit returns on shareholdings held in KiwiSaver accounts, with young people the most disadvantaged.

Shareholders' Association chairman John Hawkins said the organisation was concerned about the potential impact of any introduction of Labour's proposed 15% CGT on shares held in KiwiSaver and other retirement schemes.

“As the proposal currently stands, the compounding effect of reduced investment income over 30 or 40 years could be significant," Hawkins said. "Young people in particular may be quite adversely disadvantaged over time.”

Hawkins said KiwiSaver and a variety of other retirement and superannuation schemes currently don't pay CGT on share trading on all NZ shares, and nor do they do so on most Australian listed equities.

A written response from Labour finance spokesman David Cunliffe to Hawkins says “in circumstances in which there would currently be no tax payable on capital gains, the 15% capital gains tax would tend to apply”. Hawkins maintains this is "very different to the impression that the CGT policy release conveys.” Labour has said KiwiSaver payouts will be exempt from the proposed CGT.

Because many KiwiSaver funds have a large share component due to the belief this gives the best returns over time, Hawkins said the impact would be felt through reduced income available to the New Zealand Superannuation scheme and possibly the Accident Compensation Corporation.

“It follows that any shortfall will have to be made up from taxation, borrowing or lower benefits” Hawkins said.

Furthermore, the CGT proposal also "lacks detail" on the overseas investment regime which applies to share investments in other parts of the world.

“Many KiwiSaver and other retirement funds could potentially be affected, but Mr Cunliffe was unable to provide any detail on this aspect,” said Hawkins.

"The Shareholders' Association sees the proposal to extend CGT to occasional share traders as a potential problem. Clear guidelines would be required as habitual investors already pay CGT at their marginal rate," Hawkins added.

"The Shareholders' Association believes many investors may reduce trading to come within the lower 15% CGT threshold and this would have the effect of stifling the free flow of capital into productive enterprises at a time when the country is crying out for investment."

But because individual shareholders had been subject to CGT for many years, the Shareholders Association was not speaking out of self interest.

"However, the consequences of Labours proposed CGT policy on investment and retirement schemes such as KiwiSaver needed to be debated." See a Double Shot interview on the CGT proposal with Cunliffe here.

Meanwhile, the Shareholders' Association also announced today that founding chairman, and Hawkins' predecessor Bruce Sheppard, had resigned from its board. Sheppard was on the Financial Markets Authority (FMA) Establishment Board and is now an associate FMA board member. The Shareholders' Association will bestow the honorary title of "founder" on Sheppard. See more here.

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44 Comments

by Philly | 22nd Jul 11, 11:55am 1311292500

Well, they actually do have a CGT in Australia, US, Japan, UK, France, Germany, etc etc etc. All these countries have far larger shareholdings and share market per capita than NZ's miserable efforts. So I doubt that a CGT means the end of the world for shares.

In fact, maybe the opposite, if the tax advantages and associated rorts to property were removed by the CGT. NZers have far more invested in property (mainly non-productive) than comparable countries. So perhaps a CGT would even up the investment playing field and provide a boost to shareholdings.

Cheers to all.

by Ralph | 22nd Jul 11, 2:09pm 1311300545

There is certainly capital gains tax in Australia.

But of course the rules are quite complex and possibly quite different to what is being proposed here.

by Snarlypuss | 22nd Jul 11, 2:13pm 1311300836

There is also a CGT in New Zealand, already. But many people lie to avoid it.

by David B | 22nd Jul 11, 4:41pm 1311309695

Well bully beef for all those other big countries. Yes they do have much larger share markets than we have. That's the whole point. We don't. The focus of the question should be kept squarely on New Zealand and is:- given our very small share market, what will a CGT do to it and how will it help our market to grow given that it will have no tax advantage over property investments once a CGT is brought in?

by Philly | 22nd Jul 11, 5:17pm 1311311820

@David: It would be well and good if the share market had no tax advantage over property. Then it would be a truly level playing field, and money going to where the best return was. Rather than where the best tax advantages were.

Property isn't a "bad" investment. It just shouldn't dominate the investment arena.

Thanks for comments, cheers.

by David B | 22nd Jul 11, 5:36pm 1311312990

Well property is less risky than shares, and the yields are about the same. And Labour's CGT policy is not going to change that I'm afraid. Why not lower the rates of taxation on dividends and interest income instead of removing GST from fruits and veges, which will only result in the average NZ family buying three extra apples a week? Now that would really favour productive investment.

by Philly | 22nd Jul 11, 6:29pm 1311316186

David: No, I don't agree with lowering the tax on dividends etc. NZ needs to keep a reasonable tax base for its increasing medical costs etc associated with an ageing population. I have shares, & don't mind paying fair tax on them.

I'm sorry, but I'm a salary-earner, apparently unlike many on this site. So I am used to constant taxation on my earnings, it isn't something that traumatises me.

re GST: see my comment below. I think removing GST from fruit & veg is totally stupid. Just creates complexities & loopholes, & will benefit the rich at least as much as the poor - so is a highly untargeted & inefficient policy. Daft.

Thanks for your response, cheers

by David B | 22nd Jul 11, 8:32pm 1311323545

Ok, so you want NZ to be able to afford to pay for the increasing costs of an aging population, yet you don't want it to support productive investments. So where do you think the money is going to come from if its not from productive investments?

by Philly | 23rd Jul 11, 7:50am 1311364240

David: It sounds a little as tho the idea that people are still prepared to earn money even if it is subject to tax is alien to you. Maybe you have been able to rort the inconsistencies in the tax system so that is the case for you. Many have. However, this is not sustainable for the country as a whole. As I mention, I & many others have no problem with the concept; every aspect of our lives has been taxed since childhood.

People do need to be encouraged to save. Modest KiwiSaver incentives can help. Clearly the National Party hates any encouragement or compulsion of savings, judged from long-term history. A pity. Other things could help. Signalling a rise in the age of entitlement to super would help to motivate people to not over-rely on the State. If saving in productive endeavours was encouraged, and investing in loss-making but capital-gains-tax-free property was put onto a level playing field & not given perverse incentives, then NZ would be better as a whole.

I suggest reading Brian Gaynor's articles long-term - he has been very incisive and persuasive on our unbalanced economy and what needs to be done to improve our national wealth.

Thanks for your comments, a good debate, cheers to all.

by David B | 25th Jul 11, 12:00am 1311508805

Don't patronise me, you're not smart enough to do it. Fortunately this conversation has evolved to point out the areas where you are mistaken, with the excellent contributions of John and Money Man below who have laid it out much better than I could that there is no tax advantage that applies solely to property that so favours it as an investment class that it is diverting money from being invested in other asset classes as a result. Their comments also belie the nonsense that the introduction of a CGT by Labour would somehow stop this by balancing the playing field, and now favour investment in productive assets as a result. This is a myth.

Labour’s CGT will not favour investment in productive assets e.g., shares, as its introduction does not change what is in fact an already level playing field as it will apply equally to almost all appreciating assets. The taxation treatment of income from shares and residential property is the same now. A new tax that applies equally to any increase in the value of shares or property simply does not favour investment in one over the other. The claim that it does is straight out politicking by Labour to justify its policy, and it will need to do a damn sight better than that to convince the country that its CGT is nothing other than a tax grab by it to buy more elections by bribing its core constituency with more and more social engineering, read welfare.

As I have said above, if you want to really favour investment in productive assets like shares in this country and to support savings, then offer a 15% flat tax on share dividends and interest payments, and then see what happens. As for the rest of your presumptions I have never rorted the tax system of anything. I pay my fair share and in full and I always have. I don’t own rental properties, or use Trusts or companies to limit my taxation liability, unlike many Labour party voters I know of. Why is it so difficult for you to understand that there are normal tax payers just like me who do not like to see an ever increasing number or taxes’ being raised to support (typically) Labour Govt. spending that is unproductive and wasteful and that supports middle class welfare dependency. You may be happy with that but I’m not. It may be a cliché but it’s a true one. We need to grow this economy, not it’s Government. You cannot tax your way to wealth and prosperity. You must be able to see that.

by Les Rudd | 22nd Jul 11, 12:41pm 1311295303

This is funny:

Productive enterprise needs more stable, longer-term, less volatile investment, so by their logic this works toward this more favourable situation.

by steven | 24th Jul 11, 8:40pm 1311496804

Oh shock horror encourage shareholders to hold shares for their dividend! oh wow what a unique idea...

regards

by Carpetbagger | 22nd Jul 11, 12:42pm 1311295324

This debate is quickly becoming one of haves and have-nots, or I should say the "envied" and the "envious". Shame that so much of the public debate is controlled by the former, and the lack of balance dooms any ideas such as these to failure through the "manufacture of consent". When will there be an annoucement from the "Non-shareholders association" I wonder?

by Philly | 22nd Jul 11, 12:52pm 1311295920

I am not ultra-impressed by this "politics of envy" stuff. It is the same as saying that women shouldn't seek equal pay with men, as it is based on envy.

I prefer the term "politics of equity".

Cheers

by Ralph | 22nd Jul 11, 2:13pm 1311300807

I agree with equity, but equity is not equality.

by Philly | 22nd Jul 11, 5:22pm 1311312120

Hi Ralph. There should be equitable taxation between investment classes.

Actually, there is no "special" tax treatment of property in the tax books, so the tax treatment is actually "equal". But the realities of property (ability to negatively gear & count the losses against your other taxable income, then get a tax-free capital gain) mean that the system isn't equitable. You just can't invest in the share market and get the same benefits.

Some day this needs to be rectified; it should have been done years ago, & we have been paying the price with a paucity of investment $$ for businesses and the share market. But better late than never. So I stick to "equitability".

Cheers to all.

by John | 23rd Jul 11, 6:28pm 1311402529

Not quite correct, you are free to borrow to buy shares and deduct the interest costs and any other costs as you are for property and claim the losses against your income (as you can for property), and as long as you don't trade the shares i.e. keep them for the long term capital gain, (like you do with property) then the capital gains are tax free.

The advantage of property was depreciation, a temporary advantage repaid on the sale which has now gone, and the ability to use the property as security for the loan, though this is not a tax advantage, just a financing advantage.

by Philly | 23rd Jul 11, 10:25pm 1311416751

@John:

a) Have you tried going to your friendly bank manager recently and asked for a loan to buy shares, using them as security? Try doing so on Monday & post the response on this site. Should be interesting

b) Is that true that you can claim losses on shares against your primary income? I have never heard of such a thing.

Cheers.

by John | 23rd Jul 11, 11:19pm 1311419968

Hi Philly

See my last comment, thats what I meant by the financing advantage, I guess the bank manager regards property as less risky, due to its cashflow and personal guarantee provided by the borrower vs shares.

Re losses on shares, of course you can't claim the capital losses just as you can't claim them with property, but the same costs which in this case is interest are certainly deductable and always have been (See R Brierly vs CIR) , tax law does not discriminate, the fact that you can't borrow against shares from a bank doesn't mean that the tax law favours property, it means the lender isn't so sure that they will get their money back and they won't lend, but if you can borrow then you can deduct the interest.

Cheers

by Money Man | 23rd Jul 11, 11:27pm 1311420466

Try ASB Securities who do margin lending against shares. No property required.

They use shares as security (diffrent shares have different lending margins, bit like different types of properties) and interest rate isn't too bad (dividends credited to cover interest costs).

by John | 24th Jul 11, 10:48am 1311461306

Thanks Moneyman, you have just taken away the last excuse not to invest in shares that many people have used to say property has an advantage over shares.

Will these people stop bagging property? no, will these people now invest in shares now that they can borrow against the shares and have the same tax advantages? I don't think so, but would like to be wrong.

Thanks

by Philly | 24th Jul 11, 11:42am 1311464546

OK, John, just to clarify.

I have various friends who have rental units. They routinely claim about $10k annually against their primary income - mainly from interest charges from the bank being more than their rental income. That is, they receive a hefty tax deduction courtesy of the taxpayer every year. At the end, they sell the property and keep the gains tax-free. I've never seen anyone charged tax on their gains on the "intention" test. IRD confirms that rentals are a net loss to the tax dept, so this is official.

So you are saying that I (or anyone) could do the same thing with shares. That is, get a loan from the bank to buy the shares, routinely claim the cost of interest against the meagre earnings of the shares (dividends), and then sell after 10 years paying no tax. Could you confirm this please.

If this is the case, how come there were travelling road shows during the noughties touting how people could get into get-rich-quick schemes by rorting the tax system for rental property, but none for shares?

An interesting discussion

Cheers

by John | 24th Jul 11, 12:31pm 1311467489

Thanks Philly

You have got it in 1. Many people currently do this, why hasn't it been mass marketed? Probably due to the fact that there is not the money in it for the spruikers, due to the banks won't play ball, as they would for property, and also you can't play with share price valuations like you can with property valuations.

Also if you think of all the people sucked in by the property spruikers, they would not have bee sucked in if the asset had been shares, therefore no profit for the likes of Bluechip and Richmastery etc f they used shares. Though there would be sme high net worth individuals that wil have lost money in this way, just not mass marketed.

Cheers

by Philly | 24th Jul 11, 1:07pm 1311469669

Very convincing, John.

I will write to the IMF, OECD, and the various other agencies and economists.s who consider the NZ tax system to be dangerously weighted in favour of property, and point out the error of their ways....

Cheers

by John | 24th Jul 11, 1:58pm 1311472691

Thanks Philly

I don't disagree with you re the weighting, just that the tax advantages are also available or other clases of assets equally, and just because they and are the IMF says our tax favours property it doesn't make it so.

What makes property attractive is the lack of short term volatility when compared to shares, as the tax treatment is equal for individuals, and individuals have a more favourable tax treatment than investment funds which is what the IMF is geting at, i.e. most property is held by individuals, as opposed to shares held by investment managers on behalf of individuals. They can't get the tax free capital gains that indivduals can. There lies the IMF's and econmists positon. Individuals with property/shares get advantages that the big boys don't. And given that individuals don't favour shares then property is overweight, and institutional investors favour shares, but have to pay capital gains they unfairly complain about properties advantages and you believe them. Individuals are the competition, and the tax laws favour individuals not assets, but how much money could you make if you(IMF, Banks, Super schemes, sharemarket) controlled the billions invested in rental property.

by Philly | 24th Jul 11, 5:14pm 1311484471

Thanks John. Very convincing arguments.

Clearly the unbelievable imbalance in NZers imbalance in favour of residential property over shares is just a random factor, & not the result of our unique tax system.

I'm sure that it will stay that way in the future, and NZ will "continue" to rise up the OECD wealth stakes as we build sustainable wealth as a result of our ability to buy & sell property to each other.

Cheers

by John | 24th Jul 11, 8:07pm 1311494821

Hey Philly

My arguments are based on current tax law, what you call unbelievable is only human behaviour that occurs when given a set of perceptions i.e., peoples negative experience with non property assets, the huge property boom commencing in 1998, the ability to easily borrow on property. People remember 1987, people including myself were told to only invest in the share market what you could afford to lose, ask anyone about a property crash, they will say when, ask anyone about a sharemarket crash and the great crash 1927, 1987 will be noted. Unlike overseas sharemarkets the NZ maket did not rebound. Moe negative sentiment, insider trading, more negative sentiment.
In short tax advantaqes are over rated, peoples experiences and perceptions drive behaviour, tax is the red herring fed for political purposes to get people like yourself who have no understanding of tax law to think a certain way. The devils is always in the detail.

But what is missing are alernative investment options which you allude to but cannot supply and to which people have a negative perception, alternative invesments will create the sustainable wealth, tinkering with tax laws will not do it, it may shift investment but to where and at what cost?, this ignores the law of unintended consequences which is a game breaker when you assume taxes are the problem if they aren't.
What will stop the investment in property is the popping of the bubble not the tax laws which are effectively neutral to the individual, and better returns from alternative investments.Property will go out of favour and this is hapenning but it has nothing to do with taxation changes and more to do with the GFC and credit creation.
Nice debating.
Cheers

by steven | 24th Jul 11, 8:34pm 1311496485

Random? and not tax? I wouldnt have said so....when you can cut your PAYE in half, own an asset you can touch and cash out in say 30 years tax free, whats so hard to decide what to do? Ppl around me in work are doing this, even loading up the rental with as much debt as possible to make it looks as big a loss as possible seems to be the name of the game from what I overhear.......this strikes me as nutty behaviour....what if house prices drop substantially and the bank calls it in? You lose your home as well....I saw this in London in 1993....ppl owning 10 houses and they loose everything....

regards

by John | 24th Jul 11, 8:58pm 1311497883

Hi Steven

Thanks, yes agreed, though my point was that same can be achieved with shares, its the tax system not tax advantages obtained by investing in property that is to blame.

by Money Man | 24th Jul 11, 10:25pm 1311503111

Correct, if you borrow to purchse shares to produce an income then under current rules costs can be tax deductable.

The big difference prior to recent tax changes was that property investors could also deduct depreciation on buildings as a tax deductable expense but depreciation was a non cash item. All other expenses were a cash item.

This was how property investors were able to create a tax refund (being cash) without actually incuring a cash expense.

The perfect model for property investors was to be cash positive or neutral but a paper loss ,which they could then convert this paper loss into cash by way of tax break.

With depreciation gone they need to work on a more cash basis in terms of their investment (bearing in mind depreciation is still in place for chattels which actually do depreciate in value and need to be replaced).

So it could be argued that purchasing shares via borrowing or a rental property have the same tax advantages or disadvantages, which ever way you look at it.

by steven | 25th Jul 11, 7:02am 1311534138

Sorry but whats the difference in this context between tax system and tax advantages?

regards

by John | 25th Jul 11, 7:45am 1311536710

No difference, Point is people focus on tax advantages of property, discussion is that the advantages are not limited to property, so its not the tax advantages on property that need to be looked at but the tax system. You are qite correct that there is no difference, but people are arguing for removing the tax advantages on property, when its the tax system. Cheers

by Andrew R | 22nd Jul 11, 1:32pm 1311298347

Moan, winge, bitch. Thanks Shareholders Association.

by kiwipete | 22nd Jul 11, 1:39pm 1311298785

Labour want to tax everything they can so they can keep a large government. More jobs and pay rises for Politiicians. I'd rather we kept our own money so we could decide to spend it where fit. I don't think the government will be a better spender of our own cash.

Has everyone forgotten that we recently had a rise in GST plus a reduction in depeciation allowances on real estate investment? That, combined with the lowering tax rate is an attempt to reduce cosumption and at the same time stimulate the economy.

It would seem that with the 0.8% rise in GDP figure for March, that it is actually working. Time to keep all the doom and gloom at bay perhaps?

by Philly | 22nd Jul 11, 1:47pm 1311299220

@Pete: I won't reply to the Tea Party-ish "taxes are only so politicians can pay themselves more" angle.

The rise in GST was pretty much to compensate for NZ having a narrow tax base. Most countries have a much lower consumption tax.

Re keeping the doom & gloom at bay: Don't forget that the govt is having to borrow $300 per week; plus proposing to sell off our national assets, to try to make ends meet. We have an unworkable system.

I agree that with the Shareholders Assn that the share market needs a boost, and this would help the overall economy. Its just that the present inequitous tax system works against that, & should be remedied.

Cheers

by David B | 22nd Jul 11, 4:49pm 1311310188

Of course, Phillus, it's very difficult for all those rich pricks to avoid paying GST when they splash out on all those fancy restaurant meals and flash cars, eh? I’m surprised all you Labour people don’t want GST of 50%! Just think of how much institutional equity you could spend with that!

by Philly | 22nd Jul 11, 5:29pm 1311312540

Well, the rich are more able to claim back their GST, as "business expenses", business clothing & travel etc. The poor can seldom claim anything. So GST is actually a regressive tax, & shouldn't go higher than 15%.

I'm not Labour, haven't supported Labour for decades. But the CGT issue will influence my voting pattern, you are right there. BTW, I don't like the idea of exempting fruit & veg from GST, I think it is cumbersome and will open more loopholes & dodges. So I am no apologist for Labour.

So don't paint me as a lefty, I am centrist at heart - I dislike extremists & ideologues. I am pragmatic on economic issues, I want what is best for the country & not necessarily myself. I have investments (eg gold) that would be affected by a CGT, but that is fair enough, all income streams should be taxed. I support raising the eligibility for super until 68 - even though it would negatively impact on me (I am 57).

Thanks for your comments, cheers

by steven | 25th Jul 11, 7:15am 1311534911

"I am centrist at heart - I dislike extremists & ideologues" so am i, dont worry about such as David B, it seems we have a lot of far right whingers and fundie libertarians in here....

On the plus side Ive seen no/few loony left....which given the importance of an economy and its finance is surprising.....Im assuming thier idealogy isnt based on voodoo economics at all so simply rejects any form of thought about an economy....

regards

by steven | 25th Jul 11, 7:11am 1311534668

GST is regressive...so its the "rich pricks" who like GST...

regards

by Philly | 25th Jul 11, 7:40am 1311536434

Steven: I've never heard anyone deny that it is regressive. When GST was increased, all the experts agreed on that, tho some suggested it wasn't particularly regressive. Are you suggesting it isn't?

Cheers

by steven | 24th Jul 11, 8:53pm 1311497581

"I don't think the government will be a better spender of our own cash."

Yet the data proves you wrong, the US spends twice the GDP on healthcare, doesnt cover everyone and life expectancy is lower....hence the Canadian, NZ & UK Govn does a better job for less money.

Public v private education, currently it costs about $6.5K per year to put a child through school v double that (or more) of a private school....now arguably the private school gets better results...but when you compare decile 10 v private I am not so sure....and some private schools do worse....

Large Government.....hmm hence we have the swap between Labour and National periodically...but when you look at the cost of "Govn" v cost of public services, Govn is actually quite small a spend.

Tax everything....I think its pretty clear these days that both main parties accept that raising taxes is a no no.....what we see here is Labour attempting to make sure all income / profit is taxed and then reduces the tax burden elsewhere....so the CGT is a leveling of the playing field....

regards

by Mark Hubbard | 22nd Jul 11, 1:49pm 1311299397

Here's another reason to steer clear of any new taxes such as a CGT. Incompetent legislators. Look at how the current bunch absolutely munted the last lot of tax law:

http://tribelesshispursuitofhappiness.blogspot.com/2011/07/to-mis-manag…

by Red Dog The Pi… | 22nd Jul 11, 5:01pm 1311310860

Tribeless of the Scarcely Credible Party is unable to advise his clients properly so he blames it on others.

by John A | 27th Jul 11, 12:37pm 1311727051

Great, now they need more money so badly so the first thing they look at is putting Capital Gain Tax against the newly born KiwiSaver!

Fine go and tax whoever has a real so called "capital gain"! The people who have just been fooled by you and joined KiwiSaver are still struggling with all sorts of "tax" only, they haven't seen any "gain" yet! No hurry to milk!