It was the summer of ’89
Remember the heady summer days of 1989? As a young finance student, I spent my holidays in Nelson waiting tables at night and gutting kahawai at Skeggs fish factory by day. My holiday savings at Trust Bank Canterbury were heating up nicely at 17 per cent interest.
Besides my breakfast and the fish guts not having the best of relationships, life was good for a
19-year-old. But the real bile was inflation. It was running as hot as the sands of Tahunanui Beach and anyone with a mortgage was screaming in sheer agony.
1989 was a funny old year. A lifechanging moment in New Zealand economics which most of us no longer remember. Under a Labour Government, the Reserve Bank Act of 1989 was born. We wanted low inflation and price stability. Targets were set and off we paddled into calmer waters.
It was also a time of tax reform. cent for a one-year fix. Inflation is at 1.1 per cent and housing has had a heady beach party. Property prices are so hot they’ll almost spontaneously ignite.
Another Labour Government is in power and another tax working group is seeking reform. So what do we do?
Rather than gut the fish the obvious way, it’s been proposed we only tax real returns on assets – that’s the bit of interest or capital gain we earn above the rate of inflation.
Your deposit earns 3.5 per cent, inflation comes in at 1.1 per cent and IRD takes tax based on the 2.4 per cent real return. Nifty huh. Yup, it’ll fill up a few pages for the minister to try and grapple with.
Savings accounts and other assets like property would both have this inflation adjustment, before they were taxed.
Is it a good idea? No. It’s like trying to stuff bits of guts back in different fish.
Deposits are often short-term holdings. The bulk of our term deposits are well under three years. Other assets, like shares and property, are long-term.
Deposits mature at different times and retirees require monthly, quarterly or annual income from these savings. Inflation jumps about and will create an utter muddle with blips penalising or benefiting some savers. Interest, inflation and tax must be calculated on each payment date. It will become a sport deciding when to take income, depending on your view of the Consumer Price Index.
The idea of fixed income is suddenly shredded and banks can’t give savers any idea of net interest in advance. Three cheers will go up at the RSA every time inflation rises and their tax bill falls. Perverse.
The thing about cash is it’s simple. Keep it that way.
The thing about capital gains is they are simple. Assets go up in value and we can choose to tax them. Keep it that way.
We should simply lower the tax rate, or implement taper relief if we want to offer an olive branch. We don’t need to drag a Reserve Bank tool for driving the economy into the mix. Motives get muddled and their inflation numbers suddenly start controlling the tax-take.
If we’re going to try to neutralise the asset classes, let’s do it properly.
Let KiwiSaver accounts grow tax-free and tax them at the other end as funds are withdrawn in retirement. Let contributions come from gross, untaxed wages to encourage savings.
Tax gains on property and businesses when they are realised and taper the tax to benefit longterm holders. Keep cash easy with small tax-free savings accounts. The British have a system called ISAs (Individual Savings Accounts). This slowly introduces tax-free benefits over time, not overnight. Let savers invest $20,000 per year on a use-it or lose-it basis. If you withdraw the funds from a previous tax year they can’t be replaced. Savings become sticky.
These accounts can even be extended to house sharemarket funds encouraging more flexible savings in addition to KiwiSaver.
You simply can’t expect people to tip spare money willy-nilly into KiwiSaver when it’s essentially trapped there until age 65. Again, a tax incentive will keep this money sticky.
Implementing a Kiwi-ISA system ensures that wealthy cash savers are not delivered any large overnight benefits. This is about slowly building the wealth of ordinary savers.
If these ideas were unaffordable, even a tax-efficient savings account charging a 10 or 15 per cent rate of tax, with an annual $20,000 allowance, would be desirable.
Our cash savings system certainly needs a shake-up. All we have right now are fully-taxed term deposits and a weird little anomaly called a PIE.
These are cash deposits sitting in a managed fund. An entirely unnecessary and over-complicated wrapper for deposits. It exists only due to a tax loophole, but comes with a pile of fine print that shouldn’t be put in front of a cash saver.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.