Harbour Asset Management has added to the growing concerns about the potential impact of capital gains tax (CGT) proposals on the relatively-clean NZ fund environment.
In a paper published last week, Harbour says the Tax Working Group (TWG) proposal to impose a CGT on Australasian shares with different treatment for funds and direct holdings would disadvantage portfolio investment entity (PIE) investors over the long-term.
The analysis – carried out by Harbour chief, Andrew Bascand, and multi-asset specialist, Chris de Leva – found direct Australasian share investors would gain “measurable benefits” compared to PIE funds holding the same securities over the long term.
Under the TWG proposals, direct investors in Australasian shares would be taxed on realisation while funds would pay a CGT annually on accrued gains.
“Funds are the most accessible, diversified and cost-effective form of investing for most New Zealanders and have a high level of disclosure and simplicity,” the Harbour paper says. “We wonder why the TWG is proposing a tax system that complicates the savings decisions for individuals and reduces the advantages of pooled funds for investors?”
Furthermore, the proposed loss ‘ring-fencing’ rules for any losses on Australasian shares would be difficult to put into practice without creating inequities, Harbour says.
“Another challenge for New Zealand listed companies is that private companies’ capital gains are proposed on a realised basis, encouraging New Zealand listed companies to delist (or not list at all),” the report says.
Overall, the paper says the TWG proposals would “dampen liquidity and demand in New Zealand’s capital markets” due to:
- a more favourable tax treatment for global equities compared to Australasian shares;
- an incentive for direct investors to not sell shares, favour global equities and invest more in the family home; and.
- the preferential tax treatment for investors in unlisted companies over pooled funds.
According to Harbour, while the government’s goal of creating a fairer tax system was laudable “it is not clear how the TWG proposals improve fairness”.
“Our hope is that a “fairer” system does not come at the expense of the development of New Zealand’s capital markets,” Harbour says.
“We are concerned that the proposals may significantly distort savings for retirement and lower investment, productivity, employment and economic growth. Our view is that the current proposals most likely will tilt savings into the family home and overseas investments. Local business may face significant headwinds if the TWG’s proposals are adopted as proposed.”
The Harbour paper echoes some arguments raised last month in an analysis of the TWG recommendations by Devon Funds founder, Paul Glass. Glass says in the article, the ‘fairness’ crops up 54 times in the TWG report “but this is a very hard concept to put into place with a complicated tax system”.
“In particular what we are likely to see occur will be a tax on future generations to fund the retirement of baby-boomers, which is probably exactly the opposite of what the government would like to achieve,” Glass says.
The Labour-led government is due to hand down its response to the TWG proposals this month with any CGT implementation hinging on the 2020 general election result.