The news about it is everywhere. A capital gains tax (CGT) for New Zealand.
The long awaited final report from the government appointed Tax Working Group has been released, proposing a raft of adjustments to the tax and benefit systems including the headlining grabbing CGT.
A broad based approach to taxing capital gains has been recommended. This involves taxing capital “income“ on pretty much everything other than gains on your Van Gogh, Ferrari collection or your castle (family home). What’s more, the tax is levied at an internationally high rate, using your marginal income tax rate rather than a discounted rate which is common practice overseas.
It isn’t going out on a limb to say that New Zealand will end up with a CGT at some stage in our future, but it won’t be the one proposed by the tax working group!
In particular taxing the capital gains made on building up and subsequently selling a small business, seems not only politically challenging, but also flies in the face of the entrepreneurship that our economy needs to flourish.
According to the Ministry of Business, Innovation and Enterprise, as at 30 June 2017, there were 137,088 businesses in New Zealand employing between one and twenty people. The 614,580 people employed by these companies make up 29% of the work force and generate 28% of New Zealand’s GDP. As an economy we need innovation from these new firms to drive activity and employment. A tax here would, almost undoubtedly, reduce new business formation.
For investors the impact of the proposed CGT is much more nuanced.
The primary impact of the proposed CGT will be on New Zealand and Australian share investments in all portfolios that we manage on your behalf. This includes KiwiSaver. The proposal would mean that unrealised capital gains on these shares would be taxable at an investor’s marginal PIE tax rate. This reduces the long run expected returns on New Zealand and Australian shares.
The Tax Working Group proposed a series of benefits for KiwiSaver investors to offset some of the impact of the tax (and to keep the overall set of tax proposals revenue neutral for the government).
The proposed changes to KiwiSaver primarily benefit lower income earners. These changes include a 5% reduction in PIE tax rates for the investors currently paying PIE tax on the 10.5% and 17.5% rates, fully refunding the Employer Contribution Superannuation tax for income earners below $48k and partially refunding it for earners between $48,000 and $70,000 and increasing annual member tax credits to a maximum of $782 per annum from the current $521.
While it’s tempting to dive into the detail of which investors win or lose from the proposed CGT the fact is that these are just proposals for now. We know that there will be changes before these proposals ever see the light of day.
Change like this can be unsettling, however until more concrete proposals are made we should all adopt a wait and see approach. Investors shouldn’t make rash decisions based on something that may never eventuate. We will keep you informed and update you as soon as more information comes to hand.