Tax changes likely to fire up housing market

Changes could mean a lot more money is channelled into the housing market. Picture / Alan Gibson

Just as the housing market is showing signs of coming under control, Finance Minister Michael Cullen is set to toss a fresh load of accelerant on it by taxing overseas equity investments, warn leading sharebrokers and investors.

Reserve Bank Governor Alan Bollard's string of rate rises has finally affected home lenders, with a solid proportion of fixed-rate mortgages being renewed this year at higher rates.

The market is now showing welcome signs of cooling after prices increased 69 per cent between 2000 and last year, fuelling inflation by boosting household wealth and consumption.

But, although the proposed changes to the taxation of overseas equity investments are intended to remove investment distortions and "level the playing field" between various investment classes, most of the submissions received, including that from ABN Amro Craigs, warn it will do exactly the opposite.

ABN Amro Craigs chief executive Frank Aldridge said the key objection to the proposal was that by effectively raising the tax burden on overseas equities it would hamper them as a viable investment option.

"It goes against diversified portfolio theory. We do see it will distort investment decisions and it shouldn't," he said.

"We're probably likely to see, if it goes through in its present shape and form, money that was in international shares come back to Australasian equities, and back into New Zealand property, which I wouldn't have thought was the greatest thing for the country."

Forsyth Barr managing director Neil Paviour-Smith agreed.

Although the increased investment in New Zealand equities would probably be a net positive over time, "my bigger concern is that you'll see a lot of money channelled into the housing market where the bulk of our national savings are already concentrated".

Paviour-Smith believed not enough regard had been paid to the distortions of those types of effects.

"Where's the analysis on the impact on the average investor's portfolio or the impact on our national savings as a result of this? From our experience, unless you have a hell of a lot of money, the cost of administering this is going to make it prohibitively expensive for most investors, let alone the lesser returns that are going to be coming out of it.

"You're almost eliminating the point of having an opportunity to invest in offshore shares.

"People will leave the country or they'll take their money with them or they will send money offshore and you'll never see it again so you get this real hollowing-out effect of our market, which is not positive," said Paviour-Smith.

Kurian Verghese moved to Auckland from Australia five years ago "for a better lifestyle" after retiring from his job as Australasian managing director of a major US corporation.

Since then, he and his wife have already being paying "significant amounts" of income tax on dividend payments from their United States, British, Australian and domestic equity investments.

"The problem with the proposed changes for us is primarily due to the fact that the liability will be based on unrealised capital gains," said Verghese, 60.

"If this becomes law we will have to either liquidate all our assets outside New Zealand and Australia or go back to Australia to live.

"Most likely we will choose the latter option since the Australian Parliament is discussing significant tax cuts, particularly for those over 60. If a few thousand people like us moved to Australia, Inland Revenue will lose hundreds of millions in tax take."

The other major facet of the proposed changes is the removal of capital gains tax on managed funds' investment in New Zealand equities, which few submitters indicated they had any issues with.

While managed funds have been paying the tax on their domestic equities, direct investors have not.

Inland Revenue policy manager David Carrigan said the tax changes, which will be in place before the introduction of the KiwiSaver scheme next April, was intended "to remove the notion that if you invest into a managed fund you're a mug".

Unintended consequences

* Leading sharebrokers say the proposed capital gains tax on unrealised overseas equity investments has several unintended consequences.

* They say investors will cash up and put their money into the domestic housing market.

* Some will move overseas.