National backs NZX fear of business exodus
The Tax Working Group needs to heed a warning that a capital gains tax (CGT) that discouraged direct investments in the sharemarket could force businesses overseas, National Party finance spokeswoman Amy Adams says.
In a submission, NZX chief executive Mark Peterson and the Securities Industry Association (SIA) warned the working group that taxing the profits from direct investments in the stockmarket could set off a chain reaction that could see businesses shift their head offices to Australia.
They asked it not to press ahead with a CGT on direct investments in the sharemarket.
But if it was to recommend a CGT, the working group should ditch its suggestion that indirect investments via PIEs (portfolio investment entities) could be taxed at a lower rate than direct investments, they said.
The SIA represents 11 brokers and wealth management firms including ANZ Securities, ASB Securities and Forsyth Barr.
The Tax Working Group, chaired by former Labour finance minister Sir Michael Cullen, is designing changes to the tax system that could kick in after the next general election.
It has suggested that if it does recommend a CGT, direct and indirect investments in the sharemarket could be subjected to different tax treatments that might advantage investing through vehicles such as KiwiSaver.
But the NZX and the SIA warned that tilting the field in that way would reduce the liquidity of listed stocks and would mean share prices would be in the hands of a ‘‘relatively small number of fund managers’’.
That could in turn reduce the appeal of the NZX to overseas investors and make it a less attractive place for companies to raise capital, they said.
‘‘Without retail direct investment, both small and mediumsized companies and larger companies would have no need to list on the NZX and would likely look to list offshore in search of muchneeded investment – perhaps even being encouraged to move head office or operations offshore.
‘‘It would also become logical for New Zealanders with innovative business ideas to consider establishing their startup business in Australia so that they can more easily list there,’’ they said.
Adams said that if Kiwi businesses did relocate to Australia, they would take jobs and investment with them.
‘‘We don’t want the recent migration outflow to Australia to turn from a trickle to a torrent.’’
The damage that could be done to New Zealand’s capital market was only one of the concerns National had about a CGT, which also included the disincentives to savings and investment, and the the complexity and cost, she said.
The NZX and SIA submission said about 300,000 people invested in the sharemarket directly, and they accounted for just over a quarter of trades and ‘‘41 per cent of price-setting trades’’.
‘‘It appears from the Tax Working Group’s interim report that a different capital treatment is contemplated for Australasian shares held by investors directly, compared to those to held through PIEs. It is mentioned in the report that, given the practical difficulties that arise in applying a CGT to PIEs, one option is for Australasian shares to remain CGT-free for PIEs,’’ they noted.
The result would be that direct investments in shares would decline as investors switched to investing via funds, they said.
Adams said a number of people she had spoken to in the securities field had been ‘‘quite clear to me that even if you take away the issue of differentiated rates, a CGT applying to our capital markets would have a significant chilling effect’’.
Technically, the Tax Working Group is considering extending income tax to more forms of capital gains, rather than introducing a separate CGT, but those extensions are often referred to as a CGT as the effect is the same.
The Tax Working Group is due to publish its final report in February.