The Tax Working Group (TWG) is recommending the Government gives "favourable consideration" to exempting the New Zealand Superannuation Fund from New Zealand tax.
The final report from the Michael Cullen chaired TWG says the NZ Super Fund being taxed is unusual from an international perspective given government investment funds in other countries are not generally taxed. Additionally the TWG points out the NZ Government’s other large investment funds, being the investment fund of the Accident Compensation Corporation (ACC) and the Natural Disaster Fund of the Earthquake Commission, are not taxed.
"Tax-exempt status would better recognise the fact that the NZ Super Fund is an instrument of the Government of New Zealand and make it easier for the NZ Super Fund to apply for tax exemptions in foreign countries where they are available. Not all governments recognise the principle of sovereign immunity, so the NZ Super Fund may still have to pay tax in some jurisdictions, even if it becomes tax-exempt in New Zealand. Nevertheless, the NZ Super Fund will benefit from lower compliance costs in New Zealand and some reduction in foreign taxes," the TWG says.
"Tax-exempt status would also reduce the amount of contributions that need to be made by the Government over time in terms of the funding formula in the New Zealand Superannuation and Retirement Income Act 2001."
"The [Tax Working] Group therefore recommends that the Government give favourable consideration to specifically exempting the NZ Super Fund from New Zealand tax obligations on the basis it is an instrument of the Government of New Zealand," the TWG recommends.
Cullen, as Finance Minister, was the NZ Super Fund's political father in 2003.
The TWG comments come after the NZ Super Fund argued in a submission to the TWG it should be tax exempt, pointing out it's the only sovereign wealth fund taxed in its home jurisdiction. In a Double Shot interview with interest.co.nz last October NZ Super Fund CEO Matt Whineray said "it's an anachronism" for the NZ Super Fund to be taxed.
"We think it's an anachronism to have us be taxed. And it really highlights the issue of it when a government stops contributions. Because what that leads to is continuous withdrawals from the fund, and that has not ever really been the concept of the fund. The Fund is a savings fund, it's a buffer fund, it's putting money aside," Whineray said in October.
"What we experienced over the last nine years is a significant outflow from the fund. That's not saving, that's using it as a withdrawal mechanism."
"When contributions are being made it matters not so much that tax is being paid. However there's really no good reason to have us be taxed. There'll be rationales proposed at the time, but ultimately it's taking money out of one pocket for the government and putting it in the other pocket," Whineray added.
"ACC doesn't pay tax. [I'm] not really sure what the rationale of that distinction is. I don't think I've ever had anyone explain that to me."
The NZ Super Fund's latest annual report notes that since its inception, the Government has contributed $15.38 billion while the Fund has paid the Government $6.42 billion in tax. In effect this means 42% of what the Government has contributed to the Fund has been returned in tax.
Government contributions to the Super Fund were suspended by the National Party-led Government between 2009 and 2017. In December last year contributions resumed, with the Super Fund receiving an initial $500 million in its 2018 financial year. Contributions will increase over the next four years, with $1 billion planned for 2019, $1.5 billion in 2020 and $2.2 billion in 2021.
Tax concessions for investors in nationally significant infrastructure projects 'have merit'
Additionally the TWG says a NZ Super Fund suggestion, of tax incentives for investors in nationally significant infrastructure projects, has merit.
Last May the NZ Super Fund made an unsolicited approach to the Government on the proposed Auckland light rail project in partnership with Canada's Caisse de depot et placement du Quebec, which is developing and building the Montreal light rail network. In the interview with interest.co.nz Whineray also talked about the idea of tax concessions for investors in nationally significant infrastructure projects. He said the idea was that such a regime would "level the playing field" for mobile international capital given other jurisdictions have similar regimes in place.
"The New Zealand Superannuation Fund [NZSF] has suggested the use of a limited tax incentive to spur investment into Government-approved, nationally significant public infrastructure projects that would benefit from unique international expertise," the TWG report says.
"NZSF suggested that investors pay a concessionary rate of 14%, i.e. half of the current company rate of 28%, on profits made in New Zealand from qualifying projects. Qualifying investors would need to have a demonstrated capability to deliver world-class infrastructure projects, they would also need to bring expertise that is not ordinarily available in New Zealand and commit that expertise to the delivery of the infrastructure.
"NZSF’s suggestion has merit. The Group recommends that the Government consider the development of a carefully designed regime to encourage investment into large, nationally significant infrastructure projects that both serve the national interest and require unique international project expertise to succeed," the TWG says.
Below is the section from the TWG report on taxing the NZ Super Fund.
The taxation of the New Zealand Superannuation Fund
During its discussions on retirement savings, the Group noted the oddity that the NZSF must pay tax to the New Zealand Government. The NZSF reports that it paid $1.2 billion in tax, or 9% of New Zealand’s corporate tax take, in the 2016-17 tax year (New Zealand Superannuation Fund, 2017).
This treatment is unusual from an international perspective. Government investment funds in other countries are not generally subject to tax. It is also notable that the New Zealand Government’s other large investment funds – the investment fund of ACC and the Natural Disaster Fund of the Earthquake Commission – are not subject to tax.
The NZSF’s tax status in New Zealand affects its tax status in some foreign jurisdictions. Some countries recognise the principle of sovereign immunity from taxes – meaning that a government should not be subject to tax when it invests in another government’s jurisdiction. It is more difficult to argue that the NZSF should benefit from sovereign immunity when it is subject to tax in its home jurisdiction. The NZSF reported paying approximately $14 million in tax to foreign governments in the 2016-17 tax year (New Zealand Superannuation Fund, 2017). This is a cost to the NZSF that does not benefit New Zealand.
Tax-exempt status would better recognise the fact that the NZSF is an instrument of the Government of New Zealand and make it easier for the NZSF to apply for tax exemptions in foreign countries where they are available. Not all governments recognise the principle of sovereign immunity, so the NZSF may still have to pay tax in some jurisdictions, even if it becomes tax-exempt in New Zealand. Nevertheless, the NZSF will benefit from lower compliance costs in New Zealand and some reduction in foreign taxes.
Tax-exempt status would also reduce the amount of contributions that need to be made by the Government over time in terms of the funding formula in the New Zealand Superannuation and Retirement Income Act 2001.
The Group therefore recommends that the Government give favourable consideration to specifically exempting the NZSF from New Zealand tax obligations on the basis it is an instrument of the Government of New Zealand.