Budget 2005: First step, but detail to come
The government has been struggling with a number of issues with how to get New Zealanders saving. To some extent Dr Cullen has in his 2005 budget speech sought to alleviate some of these concerns.
Friday, May 20th 2005, 1:02AM
The announcements in relation to savings can be separated into two basic themes:- Options for improving the availability of saving products
- Options for removing the disincentives to saving.
In recent years the employer subsidised superannuation scheme has become an endangered species. Employers, particularly in the private sector, have rebelled against the increasing costs of promoting these schemes and have instead sought to cash benefits up to permit employees to undertake their own savings arrangements.
Cullen has sought to stem this tide with the announcement of the government sponsored superannuation scheme to be known as KiwiSaver. This scheme will apply to all employees unless they choose to opt out. The government plans to provide a list of approved investment providers where the fees charged by the approved providers will be subsidised by central government. Each employee will have the choice of which provider their individual funds will go to, and where no election is made a default manager will be used.
The second theme noted is the disincentives to saving. These can generally be confined to the disincentives to using a collective investment vehicle (CIV) rather than saving per se.
Cullen announced two specific policy changes to help alleviate the above concerns and placed one on the “we must do more work” table. The two announcements are that CIVs will not be required to return for tax purposes gains made on domestic equities, and that CIVs will be taxed under a standard regime which will provide for the income to flow through to the ultimate investor and taxed at their marginal tax rate. These proposals will apply from April 1 2007.
The removal of the taxation on domestic equities will be warmly welcomed by the collective investment industry. It places them on an equal footing with most investors who invest directly. However I note that an individual who actively trades will remain liable to tax on any gains.
Cullen announced that more work is to be undertaken on foreign portfolio investment. That is investment in foreign equities where the investor has no control over the investment entity. Typically this is viewed as investments of less than 10%.
There have been numerous reports on the matter to date which all in the main suggested that a tax on a proxy level of income is preferred. However it should be noted that each took a different view as to how that proxy income should be determined.
Cullen, had favoured the proxy idea, but now appears to have concerns that it would have some political difficulties. Namely that he would have difficulty selling the concept that an investor will pay tax in a year that they have not earnt any income, and may have in fact suffered a loss.
As foreign equity is likely to be part of most balanced portfolios, this is an important issue that he cannot get wrong.
In summary, Cullen’s announcements go some way to provide a regime that should enhance New Zealanders attitudes to saving. However there is a lot of detail yet to be worked through.
This comment is from Deloitte tax partner Greg Haddon.| « Budget 2005: Government misses prime opportunity | Budget 2005: What do the tax changes mean for investment markets » |
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