Judging by Twitter, every New Zealander has an opinion on the proposed #CGT. Voicing your opinion doesn’t seem at all like a minefield, so we’re joining the fray.
How would the proposed Capital Gains Tax impact my international share investments?
The short answer: It won't
There are no proposed changes to the way global shares are taxed under the FIF rules, you’d still be taxed in exactly the same way.
The long answer: It’ll mean that diversified investing could be more attractive (and this is a good thing – read on)
By a majority, the Tax Working Group has recommended introducing a Capital Gains Tax on a wide range of assets, including NZ and Australian shares (on top of the current tax paid on dividends).
Currently, you aren’t taxed at all on the gains you make from selling NZ and Australian shares (unless you buy shares with the purpose of selling them, or a few other exceptions). You are, however, taxed on your other global share investments once you have $50k or more invested. The result: we’re encouraged to focus our investing locally.
At the moment, Kiwis are generally over-invested in New Zealand. Our property is here, our jobs and future earnings potential are here, and significant amounts of our share portfolios are here. That’s a lot of reliance on the performance of one relatively small economy.
Diversification is one of the fundamental principles of investing, so our tax system shouldn’t discourage it. By evening up the tax equation, investors will be encouraged to diversify their investments globally. New Zealand also benefits because investing in overseas companies means bringing some of the profits of those businesses back to New Zealand.
But there’s more to diversification than the share markets
In New Zealand, most investment conversations focus on property. Bricks and mortar make up a significant share of our individual wealth, and much of our property is borrowed against to acquire more. All this borrowing helps contribute to our poor savings rate. Yes, there is a cultural element, the Kiwi dream still centres on owning our own home and the ongoing Baby Boomer vs Millennial “who is worse” clickbait keeps our newspapers afloat.
However, our love of property is also a byproduct of the friendly tax regime in place for gains on properties. Housing, like Australasian shares, currently enjoys a leg up from the tax system because much of the income generated (hello capital gains), avoids the hands of the IRD.
According to REINZ, since the start of 2012 the median national house price has risen over 50% to $550,000. That equates to $183,000 of tax-free capital gain for investors. The price rises have also been coupled with low interest rates, which has ensured investors borrowing to buy these properties are paying very little to service their investments.
With maths like that, it’s no surprise lots of our money, and the banks’ money, has been funnelled into property, contributing to rising prices. Savvy investors are experts at taking advantage of tax incentives, and New Zealand’s property investors have milked this one for all its worth (which is what we should do). But shouldn’t property largely exist to provide homes, not profits? While we’re absolutely not against a property play (#RentersNeedHomesToo), we don’t think property should BE our national investment strategy.
There’s also a productivity angle to this. Productivity growth is the Holy Grail of economics we all aspire to. Higher productivity generally means better living standards and economic growth that is less resource intensive. NZ suffers from low rates of productivity growth compared to its peers, partly because housing is sucking up more than its fair share of investment dollars. This effectively leaves a limited pool of local funding for businesses, which means more borrowing (at higher interest than mortgage rates) or sometimes international investment (foreign ownership of Kiwi companies).
We think it’s pretty simple. Rebalancing our investment landscape means more local money to invest in the companies that take the world forward and increase our local productivity. The proposed capital gains tax (which would extend to gains on most property other than the family home) will help do this for New Zealand and for us investors, it’ll lead to more of our favourite thing: diversification.
Hatch takes a stand
This might surprise you, but we think that the Tax Working Group recommendations are pretty damn cool.
We envision a New Zealand where Kiwis have diversified portfolios and a healthy interest in their financial futures. The opportunity to own shares in some of the world’s most successful companies may be the thing that gets investors in the door, but encouraging Kiwis to balance the risks inherent with growing up in little ol' New Zealand is what drives us.
Like with the introduction of any tax, we’re bound to feel some pain. But these tax changes play a substantial role in encouraging Kiwis to look at a wider array of investment options and to us, diversification is Queen.
But we know you have opinions too, and we’d like to hear them. Join the conversation here.