By Gareth Vaughan
ASB, the country’s second biggest holder of residential mortgages, says the Government ought to consider a "targeted" capital gains tax.
In what is so far the only submission to the Government’s Savings Working Group from a bank, ASB’s general manager for regulatory affairs Simon O’Brien, bemoans the narrow Terms of Reference imposed on the group, which is led by ex-BNZ chairman Kerry McDonald.
Finance Minister Bill English announced the creation of the Savings Working Group to consider savings policy in August, but ruled out the consideration of changes to the existing New Zealand Superannuation or the introduction of either a land tax or a capital gains tax. The Retirement Commission recommended yesterday lifting the retirement age and changes to the level of the pension, but both the Government and opposition ruled out changes within minutes.
However, O’Brien encourages the Savings Working Group to “not hesitate” to comment on capital gains or land tax options if it considers those matters will contribute to an improved domestic savings performance. O’Brien says that while this year’s Budget went some way towards rectifying an over weighting of domestic investment in non-productive assets such as residential housing, debate on other measures to remove tax distortions should be encouraged.
May's Budget reduced the rate of depreciation for buildings with an estimated useful life of 50 years or more - such as rental housing and office buildings - to 0% from the 2011-12 income year. The Government said the changes will affect landlords, property investors, property investment companies and some business owners who can currently claim depreciation at 3%, via the diminishing value method, or 2% per cent, by the straight line method, of the purchase price of their building. The change is expected to raise NZ$685 million in 2011/12, rising to NZ$690 million in 2013/14.
“While we do not necessarily support a general capital gains tax, international experience suggests the ‘too difficult to administer’ argument which has underpinned current government thinking is inconclusive,” says O’Brien.
“A targeted capital gains tax may be an alternative that warrants further consideration.”
He also suggests that differentiated tax of labour and investment income could also encourage "desirable behaviour" in domestic savings and lead to greater capital markets depth and breadth.
“We also support debate on the merits of further re-weighting of the tax base away from personal and corporate income tax to consumption tax,” O’Brien adds.
He notes that about 65% of ASB’s asset base comes from residential property exposure. Some 72% of its residential property exposure is to owner-occupiers and 28% to investment properties. At NZ$42 billion, ASB's mortgage book is smaller only than ANZ's NZ$54.7 billion book.
“Our view, based on customer behaviour and feedback, is that real property, relative to financial assets, is perceived as safe and better understood as an investment class,” says O’Brien.
“It has historically met the ‘twin goals’ of capital gain and capital protection."
He argues that removing property tax incentives relative to other asset classes is the main lever available to curb this demand over time. Following this year’s Budget, there is “merit” in the Savings Working Group considering additional ways of removing property tax incentives.
“ASB concurs with the consensus view that New Zealand has a savings imbalance,” O’Brien concludes.
“It is disappointing that the Savings Working Group’s terms of reference unnecessarily constrain a thorough analysis of, and delivery of advice on, all options to redress that imbalance.”
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