Gaynor: Tax exiles cost NZ more than lost cash

Why have many of our most successful and wealthy business people left New Zealand?

Some will argue it is because of a rise in the upper tax rate to 39 per cent and excessive Government regulation. But the opposite may be true; it could be because our tax rules are lax and sympathetic to individuals whose primary source of income is derived from overseas investments.

Any individual can avoid paying New Zealand income tax by leaving the country for 325 days in any 365 day period and taking their family with them. They must also sell their primary residence and have no intention of returning, thereby severing their "enduring relationship" with the country.

It is as easy as that.

Afterwards they may return for no more than 182 days in any 365-day period and still pay no tax here on overseas income.

Having left, they have to find a country with a sympathetic tax regime or become permanent travellers.

In several jurisdictions income earned outside that country is non-taxable. Under certain conditions expatriates living in Britain are not liable for UK income tax on earnings derived offshore. This is why many wealthy pop stars and Arabian Gulf Sheikhs are based in London.

Most employees cannot avoid paying tax because their income is taxed at source in most countries.

The other option is to become a permanent traveller. Individuals may own homes in several countries under company names and never become permanent residents. As long as they don't spend too much time in any one country they fall between the cracks and can avoid paying tax anywhere.

It has been argued that many of our wealthy expatriates would return if the top income tax rate were reduced from 39 per cent to below 20 per cent.

This is unlikely because many of them have a strong philosophical opposition to taxation. They believe the Crown squanders and misallocates the money it collects through the tax system.

Why pay tax here when one can leave the country and avoid paying any tax on worldwide investment income?

The departure of these wealthy businessmen is a loss both in terms of skill and equity capital. It also reduces the country's taxation base.

The voluntary exile of wealthy individuals has hurt many Latin American countries, particularly Argentina, over the past 50 years. It is a recent development in this country and is expected to have a negative impact on economic growth.

As a country we go backwards if the Government invests $20 million in a venture capital scheme while one of our best businessmen leaves the country with more than 10 times that amount in his back pocket.

The tax regime in the United States is far more restrictive. US citizens and green card holders are taxed on their worldwide income no matter where they live. They continue to be taxed in the US for 10 years after renouncing their US citizenship.

To obtain a replacement citizenship, a US citizen usually has to live permanently in another country and it is much more difficult to avoid paying tax when one is seeking to become a new citizen.

There is also a comprehensive capital gains tax in the United States. The only exemption is on the initial $US250,000 profit on the sale of the primary residential property or the first $US500,000 in the case of a married couple.

In contrast, a number of our richest businessmen have obtained a large proportion of their wealth from non-taxable capital profits on the sale of shares in former state-owned enterprises.

Wealthy New Zealanders are on the pig's back as far as taxation is concerned. Their capital profits are non-taxable at home and they can avoid paying tax on their investment income by leaving the country.

CDL Hotels

What is going on at CDL Hotels?

The recently released annual report disclosed that a $2.1 million subvention payment was made to the company's 70.2 per cent controlling shareholder.

Subvention payments are usually made to purchase tax losses but according to the taxation note in the annual report there was a reduction in outstanding losses in the latest year.

Anthony Lee, CDL Hotels' chief financial officer, confirmed that the payment was made to acquire tax losses but he refused to give any more details.

He requires all questions to be put in writing before giving a written reply.

Mr Lee also confirmed that the group had received legal advice from Bell Gully and Simpson Grierson. Graham McKenzie, who is a senior partner of Bell Gully, is a CDL Hotels director yet there is no disclosure of the payments to Bell Gully in the related party section of the annual report.

CDL Hotels' performance leaves a lot to be desired in terms of profitability, share price and disclosure.

* bgaynor@xtra.co.nz