Budget encourages short selling

Mark Weldon, NZX chief executive. Picture / Geoff Dale

Tax changes outlined in the Budget will encourage short selling - selling shares without owning them - and could add 7 to 12 per cent to trading volumes on the stock exchange, says NZX chief executive Mark Weldon.

At the heart of the issue is securities lending, which involves the lending of shares to another party for a fee. It allows brokers to transact shares in which they have a shortfall and provides a relatively risk-free way for larger holders of shares to increase returns.

In overseas markets, securities lending and short selling played an important role in market liquidity, said Weldon. In the United States, short selling accounted for 15 to 20 per cent of all trading.

In Australia, the figure was slightly less.

"New Zealand is smaller and more conservative, so I would guess an extra 7 to 12 per cent over time, which is pretty chunky."

In overseas markets, the lending of stock has been without a taxation consequence. In New Zealand, the stock lending has been treated as a transaction and therefore taxed.

The Budget outlined plans for changes.

Weldon said short selling was important for accurate pricing of shares. "If you think about the internet boom, what actually caused that to finally slow down was that people started to believe that stock was overvalued so they started to short the stock," he said.

"What it means is that you have a lot of people around the world saying, finally, the New Zealand market will look like all the other ones, and you can actually short-sell stock without getting taxed on it."

Weldon welcomed the Government's moves to provide fairer rules on investment income. "It puts equities at a better competitive position vis a vis property. If you put your money, say, into ING or AXA, your returns have been taxed at the individual level and they are not taxed at the individual level if you buy property. It gives a much better tax treatment of investment into markets.

"It's not a tax change that's sexy or going to win any votes, but Dr Cullen and the Inland Revenue Department have recognised the issue ... I think everybody out there in the professional world is pretty happy about it."