Welcome & Tax Working Group comments

Welcome to the first Implemented Investment Solutions (IIS) client newsletter. This will be a regular feature of the IIS calendar to keep clients up to date with what’s happening in the business, the underlying funds on the platform as well as relevant industry issues.

Of course, the big news this month centres on the recently-released Tax Working Group (TWG) final report, which recommends wide-sweeping changes to New Zealand’s taxation landscape with a range of implications for the fund industry if they are adopted.

The 99 core TWG recommendations feature a handful of headline-grabbing suggestions to impose a capital gains tax (CGT) on property (excluding the family home), farms and businesses.

Media panic aside, it is far too early in the political process to say with much certainty what the government will recommend when it responds to the TWG report in April. Furthermore, final approval of any TWG changes hinges on the support of NZ First leader, Winston Peters, who has historically opposed a CGT.

Peters has already said his party won’t support tax changes that result in an “explosion of the valuations and accounting professions”, which strongly suggests that the TWG recommendations will be watered down significantly over time.

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However, the TWG report includes several key proposals that the New Zealand investment industry should be wary of, such as:

  • Complex CGT rules for Australasian shares – Australasian shares would face a dual-model CGT under the TWG proposals. For individuals, CGT would be calculated on a realised basis while funds would be taxed on both realised and unrealised gains. This would create differences between saving vehicles like KiwiSaver and managed funds, and individuals holding shares directly. Secondly, applying a CGT to Australasian shares (currently taxed only on dividend income) would tilt the playing field in favour of global equities, which would see capital flow offshore and away from Kiwi businesses;
  • Status quo for global shares and fixed interest investments – as previously, offshore fixed income funds will be taxed on actual returns while the Fair Dividend Rate (FDR) regime applies to global equities funds. Under FDR international share funds are taxed on 5 per cent of their value each year. The TWG did flag the prospect of lowering the FDR rate or allowing it to fluctuate over time;
  • Tax-preferred KiwiSaver regime – investors would stand to benefit under the TWG recommendation to lower the individual tax rate (known as the ‘prescribed investor rate’ or PIR) by 5 per cent for KiwiSaver members currently taxed at 10.5 and 17.5 per cent. The proposal brings those lower-income KiwiSaver tax rates into line with the top PIR of 28 per cent (compared to the top marginal tax rate of 33 per cent). While this change would help offset the impact of the proposed CGT on Australasian shares, it would also create an incentive for people to use KiwiSaver funds rather than ‘non locked-in’ portfolio investment entity (PIE) funds. In particular, investors over 65, who can move in and out of KiwiSaver at will, would benefit most. Different tax rules for KiwiSaver could also create administrative complications within registry systems, which would have to factor in multiple PIR rates for each individual;
  • Extra super complexities for KiwiSaver – the TWG also proposes cutting the employer superannuation contribution tax (ESCT) for KiwiSaver members who earn up to $48,000 each year with a phase-out of the rebate for those earning over $48,000 and up to $70,000 when the tax break disappears;
  • Possible end of tax-reporting loophole for individuals – the final TWG report highlights the potential for tax leakage under current rules that allow individuals to report offshore shares investment earnings under ‘comparative value’ (CV) or FDR – with the ability to ‘game’ the system by switching methods each year to minimise tax. The TWG recommends removing the ability switch, meaning people could only use the FDR method.
  • While it is early days for the TWG process, we will continue to monitor the tax debate, looking particularly for how any changes might affect the saving landscape in New Zealand. For now, we recommend a ‘keep calm, and carry on’ approach until the government reveals its true intentions some time in April.