Tax changes mean shares give best opportunity for long-term capital gain

THE MOST popular asset classes for New Zealand investors have traditionally been property and bank term deposits.
This is a pity, as the lack of support for our capital markets has meant we have been unable to satisfy businesses' needs for growth.
We have one of the lowest proportions of invested capital in our own sharemarket among the developed world compared with other asset classes.
 Property investors have been encouraged by generous tax treatment which has allowed them to deduct expenses, including depreciation, and pay no tax on capital gains.
This has created all sorts of anomalies, including the burgeoning price of housing, making it hard for first homeowners, and the misallocation of capital into non-productive housing.
But there have been recent changes to the investment landscape which augurs well for the future.
Firstly, KiwiSaver has now been with us a couple of years and is proving a useful vehicle for the long-term aggregation of savings.
Changes to the rules now enable employees to contribute as low as  2 per cent a year of gross income and this has broadened the base further.
However, unlike Australia, superannuation contributions remain voluntary and are a long way short of Australia's  9 per cent a year (soon to move to 12 per cent) of gross income.
Last week's Budget confirmed that property investors will face stricter tax treatment in future and this could spell a change to the popularity to this asset class.
So where will investors place their capital in future?
 While term deposits remain popular and are a core depository of saved capital, their returns are low (about  5 per cent a year at present) and, after the deduction of tax and inflation, there is virtually a nil real return.
The finance company sector remains out of favour, with only the  Crown guarantee providing comfort for investors in this sector.
Corporate bonds, which are listed on the NZDX market, do provide higher yields, currently  about 7 per cent a year, and these are popular with fixed-interest investors.
Equities or shares now provide the best opportunity for long-term capital gain. The Budget announcement of $1.45 billion extra capital spending on infrastructure, and a reduction in the corporate tax rate to 28 per cent will improve New Zealand's competitiveness and encourage more investment here.
Tax changes overall will generally mean more money in people's pockets and this will act to stimulate business activity further.
Finally, despite current international volatility, share prices represent an excellent entry point for investors, who could look forward to steady growth in share values in future years.
Disclaimer: The above comments are for general purposes only. This article is not intended to offer investment advice in term of the Securities Markets Act 1988. Disclosure Statements for Forsyth Barr and its investment advisers are available free of charge on request.
Russell Garland is an investment adviser and licensed sharebroker with Forsyth Barr in Tauranga. He may be contacted at 0800367227 or russell.garland@forbar.co.nz