'Every investment situation' could be affected by tax group

A working group pondering potential changes to New Zealand's tax system could change the investment landscape for financial advisers.

Tuesday, March 6th 2018, 6:00AM

by Susan Edmunds

The new government's Tax Working Group, chaired by Sir Michael Cullen, is now accepting submissions from people who want to share their opinions on the future of tax.

It will launch a background paper next week to provide assistance.

"We've already had three very productive meetings looking at ways we can tackle the issues raised in the government's terms of reference and there's a great deal of enthusiasm for including all New Zealanders in this process," Cullen said.

The Tax Working Group's two-month consultation period will run until the end of April and the group will use the feedback from New Zealanders to influence the interim report due in September.

In a speech to the International Fiscal Association, Cullen said the group's discussion points covered everything from “financial transactions taxes, wealth taxes, and equalisation taxes through to a more generalised capital gains tax, land tax (but again already excluding land under the family home), and environmental taxes”.

He said taxes on capital income were likely to become a larger part of total tax revenue in future.

“This will be particularly so if the general trend continues for the returns to capital to grow faster than the returns to labour."

Chris Tennent-Brown, a senior wealth economist at ASB, said if he were about to embark on an aggressive investment strategy in any investment class, he would keep an eye on the working group's progress.

Every situation in which investors held assets, whether that was speculating or investing, could be captured in the working group's remit, he said.

He said while housing was the investment class that received the most interest in its tax treatment, how managed funds and direct equities were dealt with would also be noteworthy for the group.

Investment managers would be encouraged by the fact Cullen was chairing it, he said. It was under his watch that the PIE tax regime was introduced.

The Financial Services Council released a report in 2013 that highlighted that long-term savings vehicles such as KiwiSaver were taxed much more harshly than property investment - because of the offsetting available to rental property investors, the tax on fund income and the effect of compounding over many years. KiwiSavers might pay effective tax rates of 54 per cent, it said, compared to 1 per cent for residential property investors under the existing rules.

If that were tackled, it could make it easier for financial advisers to attract clients into non-property investment vehicles.

Associate Professor Aaron Gilbert, of AUT, said: "I find it interesting that they are worried about returns to capital growing faster than returns to labour, yet they aren’t prepared to look at death duties as a way of resetting the wealth inequality that results from that."

But he said the group needed to be careful about how it pursued taxing the returns on capital more heavily.

"The reality is that the NZ capital markets are shallow and illiquid, and most retail individuals have a strong preference towards investing in land. Given the obvious advantages that property has, in terms of being a leveraged investment, and Kiwi propensity towards it, any solution that doesn’t contain a comprehensive capital gains tax on property will further bias Kiwis away from alternative investments, adding further fuel to the property speculation and bubbles we have seen develop in recent decades."

Tags: financial advisers tax