Mark Lister, 26 September 2018

The Interim Report form the Tax Working Group (TWG) cleared a few things up, confirmed what was unlikely to change, and reminded us that a capital gains tax (CGT) was the end game for this process.

There’s one aspect of the report that I find very concerning, and that’s the potential for smaller share investors to end up far worse off than large institutional investors under a CGT.

The TWG is charged with recommending a suite of options to broaden the tax base, and a CGT is the desired way to achieve this. New Zealand and Australian shares would be captured by a CGT, regardless of how it was structured.

Global shares would be excluded, as the TWG is happy with the existing regime they are subject to. This essentially sees those with shares in Apple or Amazon pay tax on a notional five per cent per annum, regardless of the actual return or whether any dividends are paid.

The TWG outlines two main options to implement a CGT – taxing realised capital gains when assets are sold, or applying a risk free rate of return approach (similar to the way global shares are currently taxed).

Generally, the TWG thinks tax should be applied on realisation in most cases. However, the risk free rate of return method would be simpler and provide more certainty of cash flows for the Government.

At present, managed funds that qualify as portfolio investment entities (PIEs) are specifically excluded from paying tax on capital gains from shares. The TWG has suggested that any CGT would need to extend to these vehicles.

The problem is a CGT based on realised gains would be very difficult to implement within PIEs, requiring significant system changes. A notional risk free rate of return method would be a little easier to accommodate, and that is one solution.

However, the TWG also noted that leaving PIEs exempt from CGT was a potential option. While this would be quicker and easier, it would leave these vehicles with a significant tax advantage over direct investors.

Encouragingly, the TWG acknowledged that giving the big end of town a free ride wouldn’t be particularly sensible. It noted this approach could lower returns, undermine our equity markets and ultimately lead to New Zealand companies migrating offshore..

That’s all true, and more. In fact, I’m very surprised the TWG has even put this forward as an option. It should’ve immediately ruled it out.

Whatever the TWG comes up with in its final recommendation, it is crucial to ensure there is a level playing field and that individual share investments are treated on the same basis as PIEs.

To do anything else would be nothing short of a disaster for the local market, especially when this is supposedly all about fairness.


This article was also published in the NZ Herald on 26 September under the title "Mark Lister: Tax Working Group eyes a slice of the PIE".