The NZX warns against the introduction of a capital gains tax on NZ shares, saying it could uneven the playing field between those who invest in the market directly and indirectly through the likes of KiwiSaver

There has been much talk about how the possible introduction of a capital gains tax would affect property owners.

But what about those who have invested in the share market, either directly or indirectly through KiwiSaver or other investment funds?

The Tax Working Group (TWG) is still forming its view on the best approach towards extending the taxation of capital income.

In its interim report, released in September, it notes how individuals earning the same amount of income face different tax obligations depending on whether they earn capital gains or other forms of income.

It says the tax system is essentially regressive, as higher income earners tend to derive a greater portion of their incomes from their assets increasing in value, than lower income earners.

It points out that 82% of assets potentially affected by an extension of the taxation of capital income are held by the wealthiest 20% of households.

“The lack of a general tax on realised capital gains is likely to be one of the biggest reasons for horizontal inequities in the tax system,” it says.

However, the New Zealand stock exchange (NZX), as well as the Securities Industry Association (SIA), which represents the sharebroking and wealth management industry, are urging the TWG to recommend the Government keeps New Zealand shares exempt from a potential capital gains tax.

While they fear this will discourage investment and damage our capital markets, they’re also concerned it will create an uneven playing field between those who invest directly and those who invest indirectly in the share market. 

In other words, treat retail investors who buy and sell shares in Companies X, Y and Z direct, differently to those who invest in these companies indirectly through their KiwiSaver or portfolio investment entities (PIEs).

The NZX and SIA note in their submission on the TWG’s interim report that the report mentions it would be difficult to apply a capital gains tax to PIEs, so if a capital gains tax was introduced, these sorts of funds could be exempt.

They say this could in turn encourage investors to invest in PIE funds rather than in the share market direct.

It could also lead to the establishment of listed PIEs that each invest in single stocks.

Furthermore, the NZX and SIA say that if a capital gains tax is applied to New Zealand shares, hundreds of thousands of New Zealand investors would have to file tax returns each year and manage the cashflow uncertainty that arises from any capital gains tax that becomes payable.

This administrative burden would be another factor encouraging investors to hold New Zealand shares through PIEs to let someone else manage their tax.

Without retail investors investing direct in the New Zealand stock exchange, the NZX and SIA say the secondary market would be left in the hands of a relatively small number of fund managers, many of whom are passive investors.

Given the SIA’s members (which include the likes of ASB Securities and Craigs Investment Partners) work with over 300,000 New Zealand retail investors with assets worth more than $80 billion, this would result in reduced on-market activity, price discovery and liquidity.

The NZX would in turn be less attractive to offshore investors.

The NZX and SIA say the concentrated ownership of competing companies would affect the competitiveness of the market and be bad for the economy as a whole.

Furthermore: “[W]ithout retail direct investment, both SMEs and larger companies would have no need to list on NZX and would likely look to list offshore in search of much-needed investment – perhaps even being encouraged to move head office or operations offshore.

“It would also become logical for New Zealanders with innovative business ideas to consider establishing their start-up business in Australia so that they can more easily list there.”

The NZX and SIA say that if the Government doesn’t leave tax settings for retail investors as they are, it should at the very least ensure there is a level playing field between those who own New Zealand shares directly and those who own them indirectly through PIEs.

“For example, if PIEs are to be taxed on Australasian shares using a FDR (or similar) method, then the same option should be available to retail investors who own shares directly,” they say.

The TWG says in its report that it’s “mindful of how any differences in the treatment of capital income might distort capital markets”.

“For example, taxing individual share investments more harshly than the same investments through institutions could lower returns, undermine our equity markets and ultimately lead to New Zealand companies migrating offshore.”

It is therefore “considering these issues further”.

The TWG also notes that experience here and overseas has demonstrated that savings can be especially sensitive to tax differences between different forms of saving and different savings vehicles.

“Over the past almost 50 years New Zealand has reduced the extent that savings are treated differently depending on the saving vehicle used – life insurance, direct share investments, investment funds etc,” it says.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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23 Comments

Turkeys don't vote for Christmas either.

Neither do they vote for Thanksgiving.

TTP

Thanks giving is american, not NZ nor celebrated by nz culture

Most turkeys don't have the brain capacity to see the end of a credit bubble either!

Well-spotted.

What happens if your shares lose money.?

You would be able to claim a loss on that revenue stream, just like rental landlords do, and therefore you'd pay less tax because your gross income will be reduced by the loss. Usually the rental loss is the result of interest on mortgage, which is currently tax deductible

They may ring fence capital losses similar to the proposed rental losses ring fence.

The capital gains taxes would only be available to offset any future capital gains. This has been done to death in the lead-up to the election.

So fund managers would effectively have a tax advantaged monopoly on buying and selling shares - first thing they will do is increase their management fees. I mean why not, retail investors will be forced to use them, so ripe for the rorting.
Eliminating retail investors from trading on the NZX would also probably kill it. Companies are already bypassing the NZX for the ASX due to lack of liquidity, imagine if you remove retail investors altogether.
And lastly, in order to list on the share market you need a minimum number of shareholders. That will be immpossible to do if there are no retail investors. So yes, say goodbye to NZ IPOs. As if the lack of them the last few years isnt already enough of a problem. And where companies list, is where their head offices go, and eventually all their business operations end up - so NZ jobs will go too.

As a direct investor in shares, the sooner the NZX pisses off and dies the better. I would have no problem with everybody moving over to the ASX. would be good if we could sort out dividend imputation credits though.

CGT is not a problem for investors, CGT piled onto a pay as you go regime, with unrealised gains being taxed, is the problem. Capital gains tax hasn't impeded the US stock market, but the incremental 'take a percent here and there' from something like KiwiSaver funds has a terrible impact on their long term growth potential.

So if there is CGT applied to profits do you get a rebate if there is a financial loss on shares? Why would you invest if there is CGT it doesn't make sense only from a revenue take by the government. There are very few that directly invest in the sharemarket anyway. Only indirect through KiwiSaver or managed funds.

Potentially, yes. Just like landlords currently do (those who are highly geared, paying interest only on their rental mortgages. The interest portion is tax deductible. One invests in whateva makes the most after tax profit (take home pay). Lately it has been nz residential property and the rise in value of shares (both capital and not taxable, mostly).

Currently, if you buy n sell shares etc with some regularity, in order to make a profit, you are considered to be a share trader. A share trader is required to pay tax on all capital gains (and utilise losses)

USA has a Capital gains tax

Tax is an "arbitrary imposition", ( for want of better words ). Tax is not really based on any kind of economic rationale, it is based on the "will of the govt".
Using arguments like Capital gains is double taxed, is pointless in this context. GST is a double tax on income.
Using logic that presumes pretend income that is untaxed and therefore justifies taxing it, is also pointless, and takes one down the "rabbit hole" ...as the idea of imputed earnings can be applied to anything.

Attached is an article about Capital gains tax in USA... Its worth reading.
The better argument is not about "double tax" but about the effects of having the tax, in relation to the total tax on a sector. Fairness, equitable, distortions/effects ..etc are the tests that might determine if a tax is a good idea....or not.
eg.. NOT allowing a depreciation component on income earnt from savings is unfair.
Taxing inflation component of a Capital Gain is unfair.

It is the total tax on Business that is important, and it is the mix of those taxes that really determine the material incentives and effects. ( eg.. pursuing income vs persuing Capital gain )
ie. Corporate tax rate + dividend tax + Capital gains tax. = total tax
http://www.taxhistory.org/www/features.nsf/Articles/0C43B0D6D127333E8525...

It is unlikely that capital gains will be applied to shares as most global shares are already subject to an annual capital tax (FIF). It is more likely this will be extended to all shares (i.e. the NZ and AU grey list exemptions are removed).

If they did want to change all shares to capital gains then the fund management industry would have to change their systems to be the same as just about every other country in the world where capital gains is taxed. It's not breaking new ground.

I also disagree regarding it making NZ shares less desirable. Capital gains is still payable in the overseas investor's own country if a gain is made on NZ shares. Maybe harder to track and enforce but still liable. The current initiatives for tax sharing (AEOI) will ensure enforcement.

kiwimm. 'I also disagree regarding it making NZ shares less desirable' - as an equities investor, it is certain I will be rebalancing more away from the NZX if a CGT is introduced.Tax is one of the few incentives to remain in the tiny, exposed NZ market. If the tax treatment playing field is levelled across international boundaries the risk balance tilts in favour of getting the hell out of Dodge.

I would think the reverse would be more likely - and more sensible: Dump FIF in favour of CGT across all share markets. Extending the current insanity of FIF would be, well, insane.

Considering IRD can't even stop tax evasion in queen street eateries, how the hell are they going to monitor peoples off shore investments in tax friendly jurisdictions?

Our bureaucrats are so impractical.

In addition to the widespread evasion you describe, there are multiple legal avenues for avoidance/minimisation of CGT. The bus sized 'family home' exemption hole is just one. The preliminary scheming is already underway. A CGT tax avoidance industry will be spawned. Much productive capital and human industry will be diverted to the tedious task.

Its a tax grab.. pure and simple... what pains me about this is trying to dress it up as some fairer more appropriate way to tax. .. but at the same time derive some costly and inefficient way of imposing it.

I'd have a lot more respect for Cullen if he just came out and said "to hell with all this CGT talk and policy, the most efficient and 'fairest' way to do this is just reintroduce the 39c tax bracket at 120k".

I don't agree with it but it'd be a lot better than this pantomime.

We should end altogether with this craziness that has turned economy into a casino and a CGT targeting stock is just one step in the right direction so it is less encouraging for everyone put our money into non-productive (speculative) assets.