NZX fears worst from tax report
People who dabble in the sharemarket would be squarely caught in the net of the capital gains tax proposed by the Tax Working Group.
Officials estimate that Inland Revenue would collect an extra $8.7 billion over 10 years from private owners of listed shares under the working group’s proposed capital gains tax regime.
By 2030, the extra tax on privately owned listed shares would account for 22 per cent of the $5.9b extra tax that be would brought in annually by the proposals, they have forecast.
In comparison, tax from the sale of investment properties and second homes is expected to contribute 43 per cent of the annual total by then, with extra tax on the sale of business assets chipping in $1.21b, or 21 per cent.
At the moment, investors need to pay tax on dividends from shares, but it is a grey area as to whether ‘‘mum and dad’’ investors must pay tax on profits from selling New Zealand and Australian shares.
NZX chief executive Mark Peterson believed few such investors would be electing to do so.
In practice, if casual investors don’t appear to be ‘‘trading’’ by selling shares frequently for a profit, they can probably expect to be left alone by Inland Revenue.
That would change if the working group’s recommendation on taxing capital gains from shares was adopted by the Government.
Profits from the sale of shares would then be taxable at people’s marginal income tax rate.
If shares were sold at a loss, those losses could only be deducted against profits from other shares sold that year – not against other types of income such as wages.
The latter ‘‘ring-fencing’’ rule is tougher than that which would be applied to rental property investors.
Property investors would be able to deduct a loss they experienced selling a rental property from their total taxable income.
At the moment, individuals who have paid more than $50,000 for foreign shares that they still own (not counting most Australian shares) or couples who have paid more than $100,000 for such shares need to pay some tax.
They can do that either by paying tax on their trading profits and dividends, or by paying a single tax on a sum equal to 5 per cent of their foreign share portfolio, under the special ‘‘fair dividend rate’’ (FDR) tax regime.
The working group suggested that owners of smaller foreign-share portfolios that currently fall under those $50,000 or $100,000 caps should pay tax on capital gains in the same way as they would in future for New Zealand shares.
The NZX has been vocal in its opposition, saying the proposals would ‘‘discourage investment in New Zealand businesses and stunt the growth of our capital markets’’.
Peterson noted that the exclusion of family homes from a CGT could create an incentive for people to divert money that they might otherwise invest in the sharemarket into their properties.
He also highlights two issues that he acknowledged were ‘‘concerns’’ rather than definite problems.
One is that the FDR regime on foreign shares could turn out to be perceived as more generous than the capital tax regime for local shares. ‘‘NZX does not want to see tax settings which would create preferences for offshore investment,’’ he said.
Another is that the different tax treatment of Australian and New Zealand shares held by KiwiSaver funds could create more of an incentive for private investors to invest via KiwiSaver – rather than directly in the sharemarket – which could have the knock-on impact of reducing liquidity in listed companies.
KiwiSaver funds were already favoured by the preferential tax rates for PIE investments, he said.
Of particular concern was a suggestion from the working group that KiwiSaver funds could pay less tax on Australian and New Zealand shares than private investors, to compensate the funds for the fact they would be taxed annually on their ‘‘paper profits’’, rather than when those shares were sold.
‘‘If the treatment is different – and significantly different – then people will react rationally and what that will mean is we will have a narrowing of participation in the market,’’ Peterson said.
That would be ‘‘the last thing’’ the sharemarket needed, he said.