MAR 08 2019
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MAR 08 2019
All Posts

Taxing Times

Posted by: Aaron Drew, Economist and Rutherford Rede Investment Committee Member in finance

The Tax Working Group (TWG)[1] released its final report on how it sees New Zealand’s tax system could be made fairer and more balanced through the introduction of capital gains taxes. The government has until April to decide what, if any, of these recommendations it will adopt into legislation. The public will also have a say through the ballot box – any capital gains taxes will not be applied until after the next election.

Most commentary in the media since the report’s release has been negative, to say the least. The government itself has also been quick to distance itself from any specific recommendations. Politics will clearly be the major deciding factor of what goes through. At this point, political analysts think that the government will take up the recommendation to apply a capital gains tax (CGT) to residential investment property, and to increase the range and rates of taxes (levies) applied to polluting activities. A recent poll by Colmar-Brunton found that the state of New Zealand’s waterways is the public’s number one concern.[2] Everything else, including capital gains taxes on businesses, farms, commercial property and financial assets is seen as not surviving the political process.

Is this a case of ‘if it ain’t broke don’t fix it’? Not quite. It is conceivable that the TWG did establish a solid case, in principle, why capital gains should be taxed like any other source of income. We can expect wealth inequality in New Zealand to continue to grow so long as labour income is taxed while capital gains aren’t. Rather than looking at the short-term impacts taking a longer-term view is helpful in understanding the implications of a CGT. One point to note is that the baby boomers have already banked their capital gains and this tax is likely to influence the investment decisions of future generations. Not known for being a bastion of left-wing thought, the International Monetary Fund (IMF) has repeatedly warned that growing inequality reduces economic growth. Kicking the can down the road (again) just raises the likelihood of more punitive re-distribution measures such as inheritance taxes. Inheritance tax rates of 70% are being seriously debated by the Democratic Party in the US currently.

In light of the above the TWG’s report fell well short. The group did not formally model, at all, what the opportunity cost of maintaining our present system is, and how re-balancing the system could potentially positively impact long-term growth and shared prosperity. It’s pretty-hard for politicians to sell something that will be unpopular and costly (at least in the short term) for some, if it doesn’t have any evidence to present what the long-term benefits could be.

And many of the specific recommendations create obvious and unnecessary distortions. For example, the recommendation to tax capital gains on directly traded New Zealand (and Australian) equities, but to maintain the present tax arrangement on offshore funds, would massively dis-favour New Zealand stocks (unless through a PIE fund) over offshore equities. The NZX has quite rightly pointed out this hardly favours growing our capital markets. There are also arbitrary triggers recommended for applying capital gains tax to the family home. And why should inflation be taxed as capital gain at all? It is not clear at all why such recommendations made it to a final report – Machiavellian political considerations aside. Roll on The Future of Tax Report circa 2030.

[1] https://taxworkinggroup.govt.nz/

[2] https://www.stuff.co.nz/environment/109701626/water-pollution-the-number-one-concern-for-new-zealanders-in-new-poll

Key facts from around the globe

Events
  • The Trump Administration kicked for touch threatened increases in tariffs of over $250 billion on Chinese exports to the US. Chinese equities rallied strongly on this change.
  • The Summer of 2019 broke (again) a wide number of weather records in Australia and New Zealand. Our weather agency NIWA firmly attributed this to climate change.
  • The TWG released its final set of recommendations for applying capital gains taxes in New Zealand.
Economics
  • The RBNZ’s February Monetary Policy Statement put interest rates on hold for the next few years. While our economy is seen as robust, they are concerned that our trading partners may not fare so well given the trade war brinkmanship.
  • The IMF’s January global economic update forecasts global growth to be around it’s long term trend level of 3.5% over 2019 and 2020. Like the RBNZ, trade tensions are cited as both the main reason why growth slowed in 2018, and the main downside risk around their forecast.
  • New Zealand’s chronic housing shortage is finally starting to be addressed. New home building consents for the year ended January 2019 reached a 44-year high, at over 33,000. But with our population rapidly closing on 5 million this level is needed for several years to come.
Markets
  • Developed equity markets increased around 3% in February, bringing the year-to-date return to over 11%. This has reversed most of the brutal sell off seen in December 2018.
  • Longer term interest rates declined as central banks pulled back on the timing of future rate increases. Consequently, one and two-year fixed term New Zealand mortgage rates fell to 4% or less.
  • Residential property markets in Sydney and Melbourne reported double digit declines. Barfoot’s reported that Auckland sales in February was at its lowest level since the GFC in 2008.

Key figures

The information contained in this report is provided for general purposes only and does not constitute financial, legal, or tax advice, or consider any person's particular financial situation or goals. MyFiduciary Ltd. does not assume any responsibility for giving legal or other professional advice and disclaims any liability arising from the use of the information. If you require legal or other expert advice you should seek assistance from a professional adviser.

Tags: The World In Ten Minutes, Monthly Economic Roundup,

The Tax Working Group (TWG)[1] released its final report on how it sees New Zealand’s tax system could be made fairer and more balanced through the introduction of capital gains taxes. The government has until April to decide what, if any, of these recommendations it will adopt into legislation. The public will also have a say through the ballot box – any capital gains taxes will not be applied until after the next election.

Most commentary in the media since the report’s release has been negative, to say the least. The government itself has also been quick to distance itself from any specific recommendations. Politics will clearly be the major deciding factor of what goes through. At this point, political analysts think that the government will take up the recommendation to apply a capital gains tax (CGT) to residential investment property, and to increase the range and rates of taxes (levies) applied to polluting activities. A recent poll by Colmar-Brunton found that the state of New Zealand’s waterways is the public’s number one concern.[2] Everything else, including capital gains taxes on businesses, farms, commercial property and financial assets is seen as not surviving the political process.

Is this a case of ‘if it ain’t broke don’t fix it’? Not quite. It is conceivable that the TWG did establish a solid case, in principle, why capital gains should be taxed like any other source of income. We can expect wealth inequality in New Zealand to continue to grow so long as labour income is taxed while capital gains aren’t. Rather than looking at the short-term impacts taking a longer-term view is helpful in understanding the implications of a CGT. One point to note is that the baby boomers have already banked their capital gains and this tax is likely to influence the investment decisions of future generations. Not known for being a bastion of left-wing thought, the International Monetary Fund (IMF) has repeatedly warned that growing inequality reduces economic growth. Kicking the can down the road (again) just raises the likelihood of more punitive re-distribution measures such as inheritance taxes. Inheritance tax rates of 70% are being seriously debated by the Democratic Party in the US currently.

In light of the above the TWG’s report fell well short. The group did not formally model, at all, what the opportunity cost of maintaining our present system is, and how re-balancing the system could potentially positively impact long-term growth and shared prosperity. It’s pretty-hard for politicians to sell something that will be unpopular and costly (at least in the short term) for some, if it doesn’t have any evidence to present what the long-term benefits could be.

And many of the specific recommendations create obvious and unnecessary distortions. For example, the recommendation to tax capital gains on directly traded New Zealand (and Australian) equities, but to maintain the present tax arrangement on offshore funds, would massively dis-favour New Zealand stocks (unless through a PIE fund) over offshore equities. The NZX has quite rightly pointed out this hardly favours growing our capital markets. There are also arbitrary triggers recommended for applying capital gains tax to the family home. And why should inflation be taxed as capital gain at all? It is not clear at all why such recommendations made it to a final report – Machiavellian political considerations aside. Roll on The Future of Tax Report circa 2030.

[1] https://taxworkinggroup.govt.nz/

[2] https://www.stuff.co.nz/environment/109701626/water-pollution-the-number-one-concern-for-new-zealanders-in-new-poll

Key facts from around the globe

Events
  • The Trump Administration kicked for touch threatened increases in tariffs of over $250 billion on Chinese exports to the US. Chinese equities rallied strongly on this change.
  • The Summer of 2019 broke (again) a wide number of weather records in Australia and New Zealand. Our weather agency NIWA firmly attributed this to climate change.
  • The TWG released its final set of recommendations for applying capital gains taxes in New Zealand.
Economics
  • The RBNZ’s February Monetary Policy Statement put interest rates on hold for the next few years. While our economy is seen as robust, they are concerned that our trading partners may not fare so well given the trade war brinkmanship.
  • The IMF’s January global economic update forecasts global growth to be around it’s long term trend level of 3.5% over 2019 and 2020. Like the RBNZ, trade tensions are cited as both the main reason why growth slowed in 2018, and the main downside risk around their forecast.
  • New Zealand’s chronic housing shortage is finally starting to be addressed. New home building consents for the year ended January 2019 reached a 44-year high, at over 33,000. But with our population rapidly closing on 5 million this level is needed for several years to come.
Markets
  • Developed equity markets increased around 3% in February, bringing the year-to-date return to over 11%. This has reversed most of the brutal sell off seen in December 2018.
  • Longer term interest rates declined as central banks pulled back on the timing of future rate increases. Consequently, one and two-year fixed term New Zealand mortgage rates fell to 4% or less.
  • Residential property markets in Sydney and Melbourne reported double digit declines. Barfoot’s reported that Auckland sales in February was at its lowest level since the GFC in 2008.

Key figures

The information contained in this report is provided for general purposes only and does not constitute financial, legal, or tax advice, or consider any person's particular financial situation or goals. MyFiduciary Ltd. does not assume any responsibility for giving legal or other professional advice and disclaims any liability arising from the use of the information. If you require legal or other expert advice you should seek assistance from a professional adviser.

Tags: The World In Ten Minutes, Monthly Economic Roundup,

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