Trustees seeking refuge in PIEs could weaken our capital markets

The NZX, Shareholders Association and Securities Industry Association say raising the trustee tax rate will incentivise PIEs and could ultimately weaken New Zealand's capital markets.

Friday, February 9th 2024, 6:25AM

by Andrea Malcolm

In an unprecedented move, the three parties presented together at last week’s finance and expenditure select committee hearing on the government’s bill to increase the trustee tax rate to 39% from April 1.

Outlining the joint submission, NZX head of policy and regulatory affairs Kristin Brandon, said the proposal created a potential discrepancy of 11% between rates applied to trusts and PIEs. As PIES have narrower investment mandates, this was likely to discourage and decrease investment in small and emerging sector companies.

“If local markets can’t attract local companies they would look to list offshore, particularly in Australia, reducing local investment options to consumers into domestic investment into New Zealand assets.”

SIA chief executive Bridget MacDonald said there would be duplication with financial product managers repackaging existing products as PIEs, including bank savings and term deposits. She said this was already happening and wouldn’t help the government's revenue stream.

“The market is probably going to be significantly disrupted as investors move from direct shares into PIEs. There's no real benefit to New Zealand's capital market for this, certainly not for the companies that are listed, and the real concern is that companies lose investment capital as consumers move to index funds or other assets.”

The group questioned whether the change would raise extra money for the government. Brandon said, while the IRD’s regulatory impact statement noted the proposal was likely to bring an extra $350 million per annum, this was highly uncertain and dependent on how trustees responded.

Tax the income not the structure

The joint group is also concerned about the distortionary effects on retail shareholders saying the change wouldn’t be fair and equitable to Kiwis saving for their financial well being.

NZ Shareholders Association CEO Oliver Mander said trusts weren’t only the preserve of high net worth individuals but a common structure to support estate planning.

“If the objective of raising the trust tax rate is to create progressivity within the tax regime, we don't think that will work because you're applying a flat tax rate to a structure, not to the income that's derived from the structure. So we don't think that raising the interest tax rate will be fair from progressive taxation perspective.”

He said while some could afford a lawyer or accountant to restructure away from trusts, low income trustees would be trapped and unlikely to allow further investment within their trusts if they will be taxed at a higher rate.

“Fundamentally, we believe tax shouldn’t form any factor in how an investor chooses to structure their investments. By means tax their income, but don't tax the structure.”

In conclusion Brandon said if the proposal proceeded, consideration should be given to either exempting listed New Zealand equities or introducing a de minimis exception. “However, we strongly suggest delaying the implementation of this proposal until a full review can be undertaken.”

Robertson’s questions

Labour MP and select committee member Grant Robertson asked whether or not the aims of established trusts could be achieved through PIEs.

Craigs Investment Partners Julian Braithwaite, also speaking for the SIA which includes the country’s major brokerage firms, said yes. “I think a lot of those objectives could be if the basic objective is saving for retirement bit if the objective is to be engaged in the capital markets, make your own decisions, make decisions about who you want to invest in and who you don't want to invest in, that can't be done through a PIE because you cannot control the pie. So really, for us, it's about being equal for people who want to make their own decisions and people who want to go to a fund manager. We've got nothing against PIEs.”

Robertson said a lot of the submission was based on behaviour response and what extent that would apply to getting over a threshold of concern.

Braithwaite said it was very hard to tell which was part of the submission, that no analysis has been done on the likely behavioural response.

“For us at the SIA, we talk to our clients and we also are getting a massive amount of inbound inquiry from accountants saying we're going to adjust, and so we know that the accountants are going to react.”

The group would like to see a working group to examine harmonising tax treatment across the range of investment structures, noting the recommendation from Capital Markets 2029 that PIE taxation principles and rights should apply to all directly held investments and listed NZ equities.

Tags: NZX