Personal Finance

  • Tax Working Group interim report says work on capital income 'not yet complete' but gives two options; group is not recommending either wealth taxes or land taxes

    The Tax Working Group Interim Report as expected makes no recommendation on a fully fledged capital gains tax - but the group has ruled out wealth taxes or land taxes.

    It is, however, considering 'vacant land' and 'empty house' taxes.

    The Group said its work on capital income is not yet complete.

    The Interim Report sets out two potential options for extending capital income taxation: extending the tax net to include gains on assets that are not already taxed; and taxing deemed returns from certain assets (known as the risk-free rate of return method of taxation). Feedback on these options will inform the recommendations in the Group’s Final Report in February 2019. The Group is not recommending the introduction of wealth taxes or land taxes.

    This is the statement released by the group:

    The Tax Working Group is updating the public on its progress and thinking with the publication of its Interim Report today.

    Chair Sir Michael Cullen says that the Group has conducted a wide-ranging review in order to assess the structure, fairness, and balance of the tax system. The Group has also brought a broad conception of wellbeing and living standards to its work – including a consideration of Te Ao Māori concepts and perspectives on the tax system.

    Thousands of New Zealanders – including iwi, businesses, and unions – have engaged with the Group over the past months. “The thousands of public submissions have given us a clear indication of the key challenges and opportunities for the tax system,” says Sir Michael.

    “We see clear opportunities to improve the balance of the system by introducing environmental taxes, while measures to increase tax compliance would increase the fairness of the system. We have also identified important issues regarding the treatment of capital income in the tax system.”

    The highlights of the interim report include:

    -      The taxation of capital income. The Group’s work on capital income is not yet complete. The Interim Report sets out two potential options for extending capital income taxation: extending the tax net to include gains on assets that are not already taxed; and taxing deemed returns from certain assets (known as the risk-free rate of return method of taxation). Feedback on these options will inform the recommendations in the Group’s Final Report in February 2019. The Group is not recommending the introduction of wealth taxes or land taxes.

    -      Environmental and ecological outcomes. The Group sees significant scope for the tax system to sustain and enhance New Zealand’s natural capital. Short-term opportunities include expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging.

    -      Housing affordability. The Group has found that the tax system is not the primary cause of unaffordable housing in New Zealand, but is likely to have exacerbated the house price cycle. The Group’s forthcoming work will include consideration of the housing market impacts of the options for extending capital income taxation.

    -      GST. The Group is not recommending a reduction in GST, or the introduction of new GST exceptions. Instead, the Group believes that other measures (such as transfers) will be more effective in supporting those on low incomes.

    -      Business taxation. The Group is not recommending a reduction in the company rate or the introduction of a progressive company tax. The Group is still forming its views on the best ways to reduce compliance costs and enhance productivity.

    -      The administration of the tax system. The Group has identified a number of opportunities to improve tax collection such as increasing penalties for non-compliance as well as recommending a single Crown debt collection agency to ensure all debtors are treated equally. A taxpayer advocate service is also recommended to assist small businesses in disputes with Inland Revenue.

    Sir Michael says that extending the taxation of capital income will have a range of advantages and disadvantages. The Group is still weighing up these issues, and will come back with firm recommendations in its Final Report in February 2019.

    “Extending the taxation of capital income will have many benefits,” says Sir Michael. “It will improve the fairness and integrity of the tax system; it will improve the sustainability of the revenue base; and it will level the playing field between different types of investments. Yet the options for extending capital income taxation can be complex, resulting in higher compliance and administration costs.

    “We have made some good progress in setting out the main choices and options – but there is still a great deal of work to do before we provide our Final Report in February.”

    The Group’s Final Report will provide full recommendations on all of the issues examined by the Group, including the rates and thresholds for income tax.

    “The Group will be mindful of the distributional impacts of any changes it recommends in its final report. It also recognises that some people may need time to transition to the new arrangements.

    “It’s also worth pointing out that any extension of capital income taxation would apply from a future date, and would not have a retrospective element.

     “Everyone on the Group believes we have a unique opportunity to improve the tax system. We are all determined to deliver recommendations in February that will make a positive difference for New Zealanders,” says Sir Michael.

  • SBS Bank now offers the lowest two, four and five year fixed mortgage rates, joining other challenger banks in cutting rates as the Spring house selling season advances

    The new week will start with some very sharp 'special' mortgage rate pricing from SBS Bank.

    And that comes after reductions across the board from the Co-operative Bank midweek ( ... not forgetting that Housing NZ also reduced some fixed rates).

    The result is that challenger banks remain in the game with very competitive rates.

    SBS Bank in fact now has three market leading rates.

    It's two year fixed rate is now 4.19%, matching HSBC Premier at that level.

    Both it's four year and five year rates have been reduced to 4.89% and both are the new lowest carded rates on offer from any bank.

    For all practical purposes, the Spring house selling season only has another 8 or so weeks to go and after a modest start (albeit one marginally stronger than last year) it has settled down to a very ordinary pace. Two factors are at work this year: one is that most banks, and especially the larger ones, have noticeably tighter lending criteria and this is dampening house sales interest. That "more prudent" bank stance is both a in-house reaction to what their parent companies are doing in Australia, and more importantly, from perceived additional scrutiny from New Zealand regulators who have a sharper eye out for any prudential mis-steps.

    The second influence is the very public airing of the new KiwiBuild projects and pricing. Such deals don't go through real estate agents and banks are offering these first home buyers high LVR options. This is constraining the 'normal' first-home-buyer market for existing homes, with some potential buyers waiting for the new options, and the enhanced financing that will come with them. Lower quartile sellers are facing stern competition. And it is a situation that could go on for many years as KiwiBuild ramps up.

    In the past two weeks, wholesale swap rates have not moved much at all and the rate curves have stopped tightening.

    See all banks' carded, or advertised, home loan interest rates here.

    Here is the full snapshot of the fixed-term rates on offer from the key retail banks.

    below 80% LVR 6 mths  1 yr  18 mth  2 yrs   3 yrs  4 yrs  5 yrs 
    as at September 24, 2018 % % % % % % %
    4.99 4.19 4.85 4.35 4.49 5.55 5.69
    ASB 4.95 4.19 4.39 4.35 4.39 4.95 5.09
    5.35 4.19 5.05 4.35 4.49 5.59 5.59
    Kiwibank 4.99 4.19   4.39 4.85 5.19 5.39
    Westpac 4.99 4.29 4.79 4.35 4.49 5.29 4.99
    4.50 4.19 4.35 4.39 4.49 4.99 5.15
    HSBC 4.85 3.99 3.99 4.19 4.69 4.99 5.29
    HSBC 4.99 4.19 4.49 4.19 4.49 4.89 4.89
    4.85 4.24 4.29 4.29 4.49 4.95 4.99

    In addition to the above table, BNZ has a fixed seven year rate which has been reduced recently to 5.95%.

    And TSB still has a 10-year fixed rate of 6.20%.

  • Banking Ombudsman Scheme working on sector-wide complaints data system as it mulls increasing the limit on customer claims to $350,000

    The Banking Ombudsman Scheme is working with banks to put together a sector-wide complaints data system.

    Miriam Dean, who chairs the Banking Ombudsman Scheme's board, told Parliament's Finance and Expenditure Select Committee of these plans on Wednesday.

    "We are exploring with the banks a sector-wide complaints data system. What we're really keen to do is gather the high level data from all the banks around the complaints they handle themselves. We would then be in an excellent position to relay aggregated data back to the banks with the insights we could learn from that aggregated data so they could continuously lift their performance. And I am pleased to say the banks have responded very positively to that initiative," Dean told MPs.

    Banking Ombudsman, Consumer NZ, First Union, and New Zealand Bankers' Association representatives all appeared in front of the Select Committee on Wednesday. The appearances followed their written submissions (covered here by in response to a briefing from the Reserve Bank and Financial Markets Authority to the Select Committee on the outcomes of the Australian Royal Commission into banking.

    $200k claim limit may be increased

    In a change of heart Dean also said the Banking Ombudsman Scheme is mulling increasing the upper limit on compensation bank customers who successfully challenge banks can get. Currently the upper limit is $200,000.

    "We're considering raising our financial limit to make our service more widely available to customers. This would see us lift our present limit of $200,000 for any compensation claim to $350,000. So effectively what we're looking to do is bring it in line with the District Court jurisdiction," said Dean.

    In 2015 Federated Farmers called for the limit to be lifted to at least $500,000, and Consumer NZ and the Insurance and Savings Ombudsman pushed for an increase to $350,000. At that time the Banking Ombudsman disagreed saying only two complaints it had seen in the previous three years were excluded from its jurisdiction because the claimed amount exceeded $200,000. Further a Banking Ombudsman review had decided not to increase its claim limit.

    The last increase was in 2007. Prior to that the Banking Ombudsman limits were $120,000 for banking services, and $150,000 for banking services relating to insurance.

    Sarah Parker, Deputy Banking Ombudsman for Resolution, told that despite the $200,000 limit, some customers have received higher sums than this.

    "Some of the ING [frozen funds] cases we dealt with were resolved with compensation payments of more than $200,000, the highest appears to be $400,000. Insurance cases we deal with may also result in large amounts being paid if the bank reconsiders and accepts the insurance claim, but these are not necessarily recorded as ‘compensation’ on our system. For example, our early resolution service has recently facilitated the resolution of a complaint about a bank declining a life insurance claim where the bank reconsidered the customer’s claim and paid out over $500,000," Parker said.

    Banking Ombudsman Scheme terms of reference allow it to consider a complaint otherwise outside its rules if both sides - bank and complainant - agree.

    The Banking Ombudsman Scheme's full 2017-18 annual report is not yet available. Last year's annual report shows the Scheme had paid out $38.99 million in compensation over 25 years with 78,000 people helped. Most compensation payments are significantly below $200,000, with about 60% of compensation payments awarded in 2017/18 less than $2,000 as shown in the chart below, and just over 10% more than $10,000.

    The Banking Ombudsman Scheme is funded through levies on its bank members. Its board is chaired by Dean, an independent, and also consists of two consumer and two bank representatives. The consumer representatives are currently Consumer NZ CEO Sue Chetwin and chartered accountant Kenina Court. The bank representatives are BNZ CEO Angela Mentis and Bank of China (New Zealand) CEO Lei (David) Wang.

    'The canary in the coal mine'

    Meanwhile, Dean reiterated that the Banking Ombudsman hasn't seen the sort of systemic abuse revealed by Australia's Royal Commission.

    "We think we are a good barometer of the state of the banking sector because we're the canary in the coal mine if you like, we are the early warning system. Because if the industry is going off course, then we of course see what the customer enquiries, complaints and disputes are all about." 

    Dean said the Banking Ombudsman's caseload, which she acknowledged is a small proportion of all bank complaints, suggests none of the systemic abuses of the sort revealed in Australia are occurring in New Zealand.

    "And we are confident that we would have identified them if they existed," Dean said.

    The Banking Ombudsman Scheme has also started following up complaints it refers back to banks to ensure that having referred the customer back to the bank they get fair treatment, Dean added.

    "We've had some really good customer feedback on this and we have intervened in a few cases where we think the bank should have been more responsive. We're very prepared to call out the bank where we think it's necessary."

    Additionally she said the Banking Ombudsman Scheme is looking at banks' internal dispute resolution processes more generally.

    "We are taking up a couple of initiatives to see if there are opportunities to help the banks lift their standards and ensure consistency across the sector."

    'Australians bowl underarm and tamper with the ball but New Zealanders play fair'

    At least one of the Select Committee MPs was unimpressed with Consumer NZ's call for a significant increase in scrutiny of the banking and insurance industries. ACT's David Seymour said the worst thing that could happen is further regulation of the sector, adding costs to solve no problem.

    "“It is important to recognise that just because something happens in Australia, does not mean it happens here. In cricket, Australians bowl underarm and tamper with the ball but New Zealanders play fair. It may just be that the problem with banking in Australia is cultural, not systematic," said Seymour.

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

  • Westpac McDermott Miller survey shows the collapsing confidence contagion is spreading, with the lowest level of consumer confidence in six years

    By David Hargreaves

    It's spreading. And how.

    The plunging levels of business confidence seen since the Coalition Government came into power are now well and truly making their way into the minds of consumers.

    The Westpac McDermott Miller survey released on Wednesday shows the lowest level of consumer confidence as measured by that survey for six years.

    Westpac economists say the drop in confidence "gives genuine cause for concern about how the economy is progressing". 

    To this, I would say while a survey is just a survey and people can have kneejerk reactions to what they see and hear and get grumpy about, the fact is the plunging levels of confidence will be a worry to a Government that was already showing signs of being worried indeed, if not to say rattled, by the falling business confidence.

    The key thing is not so much that people get grumpy - but more what the grumpiness might lead to in terms of people 'shutting up shop', stopping spending, and otherwise changing their behaviour. It's this potential flow-on that then could have a big impact on the economy.

    The latest survey will do nothing to dispel the thoughts and suggestions that New Zealand is starting to 'talk itself' into a downturn.

    National's Finance Spokesperson Amy Adams said the Government doesn’t seem to realise its policy decisions "have an impact in the real world".

    "Consumers have no confidence in the economic policies and management of the Government.

     “There’s too much at stake to have a coalition Government learning on the job. Its anti-growth policies are having a real effect on how people view the economy which in turn affects how they behave within it.

     “It means businesses are less likely to hire new workers, increase wages and invest. And consumers are less likely to spend as they fear the good times are coming to an end."

    The knitty gritty of the survey is that the Westpac McDermott Miller Consumer Confidence Index fell 5.1 points in September, taking it to a level of 103.5. This is the lowest level for the Index since September 2012.

    Westpac Chief Economist Dominick Stephens said New Zealand households are particularly concerned about the outlook for their own finances and the general economy over the next year.

    "Expectations for their own circumstances in the year ahead are at their lowest, outside of an actual recession, in the history of the survey.”

    Stephens said the groups that benefited from the Government’s Families Package, which took effect from 1 July, did report some improvement in their own circumstances. “But this appears to have been outweighed by other concerns in most consumers’ minds.

    "The slowdown in the housing market and rising fuel prices are potential factors behind the drop in confidence,” Stephens suggested.

    "Indeed, these factors have been felt most acutely in the Auckland region, which saw a particularly sharp drop in confidence.”

    Stephens said it may be that consumers are starting to feel "a real impact" from the economic slowdown that began in 2017.

    "...Or it may just be that consumers are worried by what they are hearing about weak business confidence.”

    Managing Director of McDermott Miller Managing Director Richard Miller also noted that urban Aucklanders’ confidence fell further than other consumers.

    “Those working in the private sector, in particular, seem to be losing confidence in the economy, and are not expecting to be better off financially in the year ahead. They are pessimistic for the first time since March 2009, with their Consumer Confidence Index falling 10 points this quarter to 98.5. In contrast, Urban Wellington Kiwis remain firmly optimistic, albeit a little less so than last quarter at a Consumer Confidence Index of 109.4.”

    Miller stressed the contrasting confidence levels between those in the public and private sectors.

    "Probing questions indicate that both private sector oriented Urban Auckland and public sector dominated Urban Wellington are diffident about the effectiveness of Government policies, but there is a sharp difference in belief about what drives their own region’s economic future. Wellingtonians have confidence in their people to create good economic times over the coming year, while Aucklanders expect population growth and new or growing industries to lift the economy."

    The survey was conducted over 1-10 September, with a sample size of 1,556. An index number over 100 indicates that optimists outnumber pessimists. The margin of error of the survey is 2.5%. 

    In their detailed economic note on the survey results, Westpac's Stephens and senior economist Michael Gordon say the survey results "present a challenge to our expectation that the economy will regain some momentum in the short term on the back of Government spending".

    They say that unlike business surveys, consumer confidence covers "the whole spectrum of voters, so it’s not obviously slanted based on who is in power". They point out that up until now, the post-election consumer surveys have been mixed rather than consistently softer.

    "So the latest drop in confidence gives genuine cause for concern about how the economy is progressing." 

  • BNZ delays comprehensive credit reporting until 2019 blaming 'new requirements introduced by regulators in relation to cloud-based storage platforms'

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

  • Terry Baucher hopes to see the Tax Working Group signal a break from the past, either in the form of a Capital Gains Tax or something else such as a land tax

    By Terry Baucher*

    Does the news that the Tax Working Group’s interim report due very shortly won’t specifically recommend a capital gains tax (CGT) mean it will be the fifth such group in the past 50 years to have considered the issue before concluding “Yeah, nah”? 

    Not yet. Firstly, this is an interim report which is intended to invite further commentary on the TWG’s initial proposals. This is broadly similar to the process followed by the McLeod Tax Review in 2001. My understanding is that the interim report will analyse in some detail not only the merits or otherwise of a CGT but also how it might work in practice. It will probably be the most comprehensive review of the issues around CGT since the Consultative Document on the Taxation of Income from Capital in 1990. 

    Although the issue of CGT is dominating attention, the TWG has a very wide brief and its interim report will examine other issues such as the overall design and fairness of the tax system, environmental taxes, the taxation of savings, GST exemptions for particular goods, the taxation of companies and multinationals, the possibility of a land tax and taxpayer rights in dealing with Inland Revenue. The resulting report will be substantial and is probably likely to run to over 200 pages. Yet, for all that the focus will be on the TWG’s proposals around the taxation of capital.  

    Rather like Banquo’s Ghost the issue of CGT has been an unwelcome guest for every tax review over the past fifty years. During that time the debate over CGT has developed a Groundhog Day quality to it. Every few years a review of New Zealand’s tax system is announced. Some months later, after due deliberation, a report is released which includes passages summarising the pros and cons of a CGT before concluding, somewhat reluctantly, it is not appropriate.   

    In between each review a major change is introduced widening the scope of income tax to include transactions previously treated as exempt capital gains. These legislative changes essentially undermine the previous review’s reasoning against a CGT. At frequent intervals, international organisations such as the OECD and the IMF will call for a CGT to address imbalances in New Zealand’s economy around housing and saving. The IMF’s recommendation in March 2017 for a CGT was just the latest such instance.

     Meantime, as if thumbing their noses at each tax review’s arguments against a CGT, the list of countries introducing capital gains tax legislation grows: Canada in 1972, Australia in 1985 and South Africa in 2001. 

    This rather pusillanimous pattern began with the Ross Committee in 1967 which after declaring “On grounds of equity there is strong justification for taxing realised capital gains,” concluded “we have finally decided against such a recommendation”. The Ross Committee was followed in 1982 by the McCaw Task Force, which opined “The Task Force considers that failure to tax real capital gains is inequitable in principle, and is seen by many to be so.” Ultimately, the McCaw Task Force was “not convinced of the need for a separate capital gains tax, does not propose its introduction, even though capital gains are being made by some which should in principle be taxed.”  

    The McLeod Tax Review in 2001 detemined “New Zealand should not adopt a general realisation-based capital gains tax. We believe that such a tax would not necessarily make our tax system fairer and more efficient.” It then proceeded to hedge its bets by adding; “Nevertheless, we also remain of the view that the absence of a tax on capital gains does create tensions and problems in specific areas.”

    In 2010 it was the turn of the Victoria University of Wellington Tax Working Group. In time-honoured fashion its report concluded:

    “The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). While some view this as a viable option for base-broadening, most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.”

    And yet, despite all this previous consideration and rejection, another tax review finds itself confronting the CGT issue anew. There are several key factors as to why this pattern endures but three merit closer review.

    Firstly, in the absence of a comprehensive CGT, there is presently no clear legislative framework to deal with the taxation of capital gains in general and the arrival of completely new asset classes such as cryptocurrencies like Bitcoin. This results in confusing uncertainty as some taxpayers report gains as income whilst others treat the gains as tax free. Although issues still arise in other jurisdictions with capital gains regimes, investors know that returns will be taxed either as income or under the relevant CGT regime.  

    By contrast investors in cryptocurrencies are presently unsure about whether gains are taxable or exempt. This all-or-nothing approach understandably tempts investors to treat gains as tax free sometimes on the most dubious of grounds. Even though the bright-line test relating to sales of residential property has been law now for almost three years, there appears to be widespread non-compliance.

    Secondly, as every tax review has acknowledged to varying degrees, the present tax treatment of capital is inequitable and creates unfairness. Differing tax treatment applies to different classes of assets leading to what the 2010 review called ‘incoherence’. The TWG’s brief includes reviewing the overall fairness of the system and in this regard the background issues paper noted that “real property held for more than two years (soon to be five) is undertaxed relative to other investments when there are capital gains”. Since peaking at 73.8 % in 1991 home ownership has fallen steadily to 63.2% in 2016. This means those substantial untaxed capital gains are being derived by fewer people. 

    Separate from the issue about unfair tax treatment the TWG is also considering the issue of wealth inequality. A background paper on the taxation of capital Income and wealth commented:

    “Something that may not have been given enough attention in the discussion until recently has been that wealth ownership has a very skewed distribution, and reducing the tax on capital income may have contributed an increasing level of inequality in many developed countries in recent years.”

    This combination of growing wealth inequality and favoured tax treatment for some assets, most notably property, means that the issue of a CGT is unlilkely to fade away even if the TWG decides not to recommend it.  At some point the nettle must be grasped either through a comprehensive CGT or some other tax such as a land tax.  

    Finally there is plain simple self-interest. Not just of groups such as the NZ Property Investors Federation but of our elected representatives. As Thomas Coughlan pointed out earlier this week currently 113 MPs own 306 properties between them or an average of 2.6 each. At a time of falling home ownership only seven MPs do not own any property meaning property owners are greatly over-represented in Parliament. Even if the TWG does recommend a CGT, getting it into law will require a large number of MPs to decide their self-interest in getting re-elected outweighs their pecuniary self-interest.   

    We’ll know in a few days whether the present TWG is proposing to break the pattern of fifty years or whether we’ll find ourselves re-hashing the same arguments in 10 years time. I’m hopeful that we will see the TWG signal a change of approach, either in the form of a CGT or some other mechanism such as a land tax. For now it’s a question of wait and see.

    *Terry Baucher is a tax consultant and director of Baucher Consulting Limited a specialist tax consultancy.  He is the co-author with Deborah Russell MP of Tax and Fairness published in 2017 by Bridget Williams Books and parts of which have been reproduced here.

  • Why TOP Leader Geoff Simmons wants the Tax Working Group to take a capital gains tax off the table... and replace it with an equity tax

    By Geoff Simmons*

    It appears that the Tax Working Group (TWG) is quietly dropping the idea of a capital gains tax (CGT), although the Labour-led Government is still talking up the possibility. This isn’t surprising. Despite the fact that the Government’s Terms of Reference didn’t leave the TWG with a lot of room to move, experts will struggle to find much evidence to support a CGT.

    Why a CGT is a bad idea?

    A CGT excluding the family home has largely failed in controlling house prices overseas. Countries with a CGT have seen a similar rise in house prices, and still face similar challenges with affordability. At best a CGT has simply taken the edge off their real estate booms.

    Why does CGT fail to solve the problem overseas?

    Firstly it exempts the ‘family home’. Given that this makes up a 60% of houses and a large percentage of house purchases, it won’t act as a disincentive for bidding up the price of housing. Exempting the family home means that John Key would still not pay any tax on the sale of his $20m Parnell home. As I’ve argued before, we simply can’t have a fair and efficient tax system with an exemption on the family home.

    Exemptions also cause all sorts of problems in the working of the tax system, as we can see overseas. The fact is that rich people can afford an accountant, so they are much better at exploiting exemptions than you or I. The concept of the family home may seem simple, but in reality it is difficult to define for a tax authority. Some 42% of New Zealand’s wealth is in owner occupied housing. Just watch that number go up if it stays tax exempt.

    Secondly, capital gain is only one of the tax loopholes that encourages overinvestment in housing. The others are excessive use of write-offs and the tax loophole on imputed rental – the value that an owner-occupier gets by living in their own house rent free. The Tax Working Group shows that it is this last loophole that is the greatest. See the graph below? The lowest taxed investment – by a long way – is owner occupied housing. No wonder Kiwis have piled in, putting almost half our national wealth into our “family homes”.


    Imposing a CGT won’t close the gap with other investments, so there will still be a strong tax incentive to invest in housing. Closing one loophole won’t prevent speculation so it won’t stop capital gain from happening; it will only tax that capital gain (sometimes).

    Finally a capital gains tax is horrifically inefficient. The tax is levied on the sale of an asset, so it provides a strong disincentive to sell any asset – whether that be a business or a home. This comes at a cost - reducing the efficient working of the economy. In other words what is the best way to avoid a CGT? Don’t sell your asset. Ever.

    What wealth taxes would work?

    For a wealth tax to work it needs to be difficult to avoid and not result in double taxation (taxing assets that already pay sufficient tax). CGT fails at the first hurdle as it is levied only on sale of the asset and excludes the family home.

    A land tax has been much discussed as an alternative. It is a simple tax, levied annually as a percentage of land value. This would stop price increases and is very difficult to avoid. The big advantage is that it encourages empty land to be developed in order to pay the tax. However, it suffers from double taxation – for example a farmer may be paying a high level of tax on their profit from working the land but she still gets stung with paying a land tax. This usually leads land tax proponents down the road of exemptions, which quickly gets much more complicated than it first seems. Meanwhile non-land assets like gold bars continue to pay zero tax.

    TOP’s alternative is to ensure all assets pay a minimum level of tax. It too is paid annually and difficult to avoid. However the advantage over a land tax is it avoids double taxation while taxing any non-productive asset. In practice it will have the same benefits as a land tax – stopping capital gain and encouraging empty land to be built on. It will work out just as simple as a land tax but has the advantage of taxing all investments equally. This will ensure that we start investing in businesses that create jobs and exports – stuff that can make us richer – instead of putting all our money into housing.

    TOP doesn’t want to just tax capital gain in our housing market, we want to stop it completely. If we manage to do so for 15-20 years, houses may just about become affordable again.

    *Geoff Simmons is an economist and The Opportunity Party's leader. 

  • A PSA on PIRs: Check you're paying the right amount of tax on your KiwiSaver, especially if your income's changed recently

    By Jenée Tibshraeny

    Has your income changed recently?

    Perhaps you’ve had a pay rise or reduced your hours at work.

    Well I have a seemingly obvious but important public service announcement for you.

    It’s up to you to make sure you are paying the right amount of tax on your KiwiSaver.

    While you don’t have to take care of the tax you pay on your salary or wages, KiwiSaver is different.

    When you sign up to a scheme, your provider will ask you what your prescribed investor rate (PIR) is. Easy.

    But unless you’ve changed schemes, you may not have paid much attention to your PIR again.

    If during this time your income has increased in such a way you should have a higher PIR, it’s up to you to update your provider.

    If you don’t, you’ll need to file a tax return to account for the under deduction. Shortfall penalties may apply.

    But if your income has decreased in such a way that you should have a lower PIR, and you don’t tell your provider, you won’t be refunded.

    Yes - this is a mismatch.

    A minor issue for the country, a big one for the individual?

    Given the lack of financial literacy around KiwiSaver, I'm concerned there may be a number of people using the wrong rate.

    At the worst end of the spectrum I have heard anecdotes of people thinking the PIR refers to the expected rate of return, so have selected the highest rate of 28%.

    The Inland Revenue (IRD) however says there isn't a major compliance problem around PIRs because “the process of getting it right is so simple”.

    It says it regularly urges taxpayers to update all of their tax-related details.

    It also says it “understands” providers remind their members to update their details.

    As someone whose job it is to spend a fair bit more time than the average person looking at personal finance matters, I haven’t noticed the IRD or KiwiSaver providers pay a whole lot of attention to PIRs.

    While the IRD says it would “see a PIR discrepancy if it became evident during an audit or investigation of some other kind”, I suspect it isn’t worth its while proactively monitoring people's PIRs.

    After all, it has nothing to gain if it finds a person paying 28% when they should've been paying 10.5%.

    Yet the difference this could make for the individual over time could be substantial, especially if you consider the return that over-payment could've earnt.

    And if the IRD finds a person's been paying 10.5% when they should’ve been paying 28%, they could find themselves slapped with a nasty bill.

    As for providers, well, this is just one of many areas I believe they could do a better job communicating with their members on.

    There’s no denying it, people disengaged with their finances are the real culprits here. And even if reminders are sent out, what's to say people will pay attention to them. 

    It just seems a bit off that the country’s almost universal retirement savings scheme hinges on a tax system that puts the onus on the taxpayer to determine their tax rate, when the PAYE system doesn't.

    CFFC calls for automation

    The Commission for Capability's managing editor, Tom Hartmann, agrees and is particularly concerned about those paying too much tax. 

    The Commission would therefore like to see people somehow automatically allocated a PIR. 

    "It just seems to us in this day and age that something like a tax rate should be able to be automated and not left up to KiwiSaver members to get this right," Hartmann says.

    The Commission didn't include this recommendation in its three-yearly Review of Retirement Income Policies published in 2016, so hasn't yet fleshed out the logistics of how this could be done. 

    Nonetheless, I agree with Hartmann.

    While the need is most pressing for KiwiSaver members, it would also be handy for those invested in other portfolio investment entities (PIEs).

    If you’re unsure whether you’re using the right PIR, see this page on the IRD’s website. If you’re still confused, this ASB calculator is one of the easier ones to use.  

    And if you think you’ve been using the wrong PIR, see this IRD page.

    This page on the Sorted website also has more information.

  • Government review shows two-tier retail electricity market between households that shop around and those that don't

    A Government-appointed panel has found residential electricity prices have risen by 79% in the past 28 years (after inflation), with those who don’t or can’t shop for better deals hit disproportionately hard.

    The panel, chaired by Miriam Dean QC, has released its first report on the state of the electricity market. It is seeking feedback on its findings, before making recommendations to the Government on improvements.

    The review is part of the coalition agreement between Labour and New Zealand First.

    It has found that since 2000, New Zealand’s residential prices have risen faster than most other OECD countries.

    About 103,000 households spent more than 10% of their income on domestic energy in 2015-16. Children were over represented among these households.

    “A two-tier retail market appears to be developing: those who actively shop around enjoy the benefits of competition, and those who don’t pay higher prices,” the report says.

    “The average gap between the cheapest retailer’s price and the incumbent retailer’s price has increased by about 50% since 2002, after accounting for inflation.

    “Some households struggle to understand the various plans and how to choose the one that’s best for them, and low-income consumers miss out more often on prompt payment discounts - which can be as high as 26% of the bill, and which budgeting and advocacy groups say are really late-payment penalties.”

    The report says electricity retailers don’t make it easy to compare prices and contracts.

    “Despite so many new retailers, the big five generator-retailers still have more than 90% of the market, suggesting it is still hard for independent retailers to expand,” it says.

    “New entrants are unhappy with ‘winback’ discounts aimed at drawing back departing customers.

    “The lack of an effective wholesale contract market is another barrier to competition, they say.

    “We found nothing to suggest grid operator Transpower or distributors are making excessive profits.

    “Nor, based on our analysis to date, have we found evidence to indicate generator-retailer profits are excessive (though we note the lack of sufficiently detailed data means this is not a definitive assessment).”

    While households have been hit, commercial prices have fallen by 24% since 1990. Industrial prices have risen by 18%.

    The panel attributes this divergence to distribution charges shifting from businesses to households; generation and retailing-related charges shooting up for households; and GST, which only residential consumers ultimately pay, rising from 10% to 15%.

    The report says: “A more ‘joined-up’ approach is especially needed between regulators and government agencies to address energy hardship 0 a task in which the industry also has a role to play. Extending the benefits of competition to all consumers would be a good starting point.

    “Low fixed charge tariff regulations help some households but raise costs for others and push some further into energy hardship. We think they are poorly targeted at only one type of household in need of help.”

    Electrification of the economy

    The report also recognises the uptake of electric vehicles and the replacement of coal and gas-fired boilers with electric technologies will see demand for power sky-rocket. The Productivity Commission last week put the increase at 65% in the next 30 years.  

    Yet it says: “Emerging technologies have the potential to soak up extra demand and contain price rises - which is why it is so important the regulatory framework allows us to fully exploit the opportunities they present.”

    The report notes the use of solar panels and batteries turning today’s one-way flow of electricity from supplier to consumer into a two-way flow, for example.

    “There is also a risk, as noted, that higher-income households may benefit more at the expense of lower-income households if pricing structures are not changed. But changing price structures will create winners and losers, and this will need careful management…

    “All these matters we will examine in more detail in the next stage of our review.”

  • FMA boss calls for financial services firms to stop focusing on shareholders at the expense of customers, with public trust the worst it has been since the GFC

    Rob Everett by Jacky Carpenter.

    The CEO of the Financial Markets Authority has labelled the lack of trust in the financial services sector a “crisis” - the largest of its kind since the 2008 Global Financial Crisis.

    Speaking at the Financial Services Council and Workplace Savings NZ conference on Thursday, Rob Everett said the focus on financial stability in the wake of the GFC had masked the risks caused by poor conduct.

    Now, “in a very visible and painful way,” financial services firms are paying the price for not always giving their customers a fair deal.

    “You could say that this is the second phase of a crisis in trust for financial services,” Everett said.

    He pointed to the 2018 Edelman Trust Barometer report, which shows the slow recovery of trust in financial services firms since 2012 has stalled.

    According to the global survey, we trust our banks to complete transactions on our behalf (mostly) and to keep our assets safe from fraud, but that we don’t trust them to look after us.

    “So trust is on the decline again. It’s a currency that, in some quarters at least, appeared to have lost its value” Everett said.


    Cross-selling and shareholders’ demands

    Everett placed some blame on the “financial services supermarkets that banking groups have become”.

    He said banks are spread too thinly across product lines; their cross-selling being unnatural and leading to bad customer outcomes.

    He also called out company directors: “Shareholder expectations emphasising short-term earnings over long-term value drove boards and management beyond the bounds of what was decent and right.

    “The focus on serving shareholders above all else, in much of the current Western corporate law model, might be argued to be at the heart of the issue.”

    Systemic change

    Everett said some of this could be changed by regulation, “but not much”.

    While the Financial Markets Conduct Act sets out what issuers or sellers of financial products should do, it doesn’t actually talk much about fair treatment or community expectations.

    He challenged firms to not just ask themselves whether they’re complying with the law, but whether they’re doing the right thing.

    “So one challenge here is how to re-engineer these complicated institutions so that the voice of the customer is heard. And where the customer has no voice, because they don’t actually know themselves what good looks like, someone else is looking out for them.”

    Everett also challenged firms to “change your view of how much money senior management should make and how much shareholders can expect, and focus unrelentingly on serving your customers…

    “I can’t stress enough that we can’t change this by tinkering at the edges.”

    He went on to say the Australian Sedgewick report, which recommended “balanced scorecards” for frontline sales staff, didn’t go far enough, saying it was good to see some firms [ie ANZ and IAG] stop paying their staff for making sales.

    He also credited firms [ie AMP] that were walking away from paying the advisers who sell their products soft commissions.

    “There’s no point pontificating at the top about treating customers well unless you build the systems, the controls and the culture that does it for you.”

    FMA reaching the end of its tether 

    Everett talked about the banking and insurance conduct and culture review the FMA and Reserve Bank are undertaking, saying: “We have spent less time trying to unearth isolated but dramatic failings to publicly humiliate banks or insurers with.

    “But we have focused more on whether the fair treatment of customers is actually embedded in how these firms are set up…

    “I see how hard many of you and your firms are trying to shift the way you operate to earn my trust and that of your customers.

    “But I really don’t think they [the public] see it. 

    “The issues highlighted by the Australian Royal Commission have probably set this back a good bit, even on this side of the Tasman, but in any event change was moving slower than it needed to.

    “In terms of an understanding of the need to build the right structures and processes, we see variances across firms in each sector and even within firms.”

    Everett highlighted the FMA’s frustration over the slow pace of change, warning this could see the regulator become less understanding and tolerant of firms that “talk a good game but don’t put the hard yards in to make sure it happens”.

    He concluded: “Changing profitable practices and behaviours that seemed fine only a few years ago because the expectations of customers and regulators have changed seems hard.

    “Well, have some faith in the long-term power of trust and the differentiator that trust and fairness will be. You know it makes sense.”

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