Mary Holm: Capital idea gains traction

Q: I have been a regular reader of your column since it started. Your effort last Saturday really disturbed me and if I bother to read future columns (I am not intending to) I will be looking carefully at the answers you give.

You obviously expected to get a raft of protest letters since you suggested would-be critics should read your view on capital gains tax (CGT) at least twice. I did but I remain dumbfounded that you, a financial adviser, are seriously advocating CGT for New Zealand.

I would have thought you would at least support the pitifully few small investors trying to create sufficient income from capital to make them independent of benefits from the state.

Your column clearly says that you are in a different camp, one that is somewhere quite distant from where I suspect most of your readers are.

Call me cynical, but I regard the recent proposal on foreign capital investments as the thin edge of the wedge. I am sure that hidden away the Government has a plan that goes like this:

Let's put this CGT on all foreign investments (except Australia) and with a threshold of $50,000. If we get away with that, let's remove that $50,000 exemption. If we get away with that let's cut out the Australian advantage and, hey, if we get away with that let's have CGT in New Zealand. Why not, Mary Holm thinks it is a great idea and she is an experienced investment adviser.

OK, now shoot me down with a whole lot of facts and figures. I am holding to my opinion and I add this: Any political party that tries to introduce CGT will commit political suicide. However, if such a tax is fed into the economy bit by bit, creeping socialism, then voters may accept it without too much grumbling. To me that is frightening.

A: If that's what it takes to get broad-based CGT. But no, I'm greedy. I want the whole lot now.

As far as your reading habits are concerned, don't stay away. Hang about and keep disagreeing. That's much more interesting for both of us.

Avoiding facts and figures, since they don't interest you, I'll just say this: I do support small investors. I also support those who generate income from working. Above all, I support fairness and simplicity in the tax system.

Judging by the flood of emails I've received, which are running more than two-to-one in favour of a broad-based CGT, my views are not as different from readers' views as you think.

And, while letters to this column are not votes, the overwhelming support for CGT suggests it might not be as unpopular as politicians expect.

One more thing: I'm not a financial adviser but a writer and seminar presenter.

Q: Hurray! At last! A simple critique of this discriminatory tax proposal in last week's column. However, let us be clear, the Government's proposed so-called CGT is not a tax on gains or income but a capital levy on those who have invested in major overseas companies.

This levy will do nothing to enhance NZ's position in the eyes of prospective investors, intelligent prospective migrants or returning ex-pats. Indeed, it may discourage all three.

I have made submissions as you suggested and written to the PM to point out the folly of Michael Cullen's ways. To no avail. I hope your article may just provoke some sensible reaction.

The problem as I see it is that the Finance Minister appointed a committee and told them that a full-scale CGT was not politically acceptable. Having been told to design a donkey, they have given us a headless camel. Then they added exemptions to prevent vote loss in the Muldoon manner - exempt Australian companies and then, irony of ironies, GPG.

It is the tax-avoiding antics of companies like GPG, Brierley (who have paid minimal cash dividends) that caused the minister to throw a fit, instead of correcting the loopholes.

I agree, let us have a clear CGT on all asset classes (principal private residence excepted) when gains are realised, not a capital levy on one part of one asset class with exceptions where you feel voter threat.

I plan to sell up my New Zealand asset base and move to Australia. I will gain franking credits on my Australian portfolio, pay less income tax on my worldwide dividend income and be able to manage the Australian CGT at half the NZ rate when I choose to realise the gains and not before. I will sacrifice my NZ super but retain the UK portion (50 per cent) now deducted by New Zealand.

A: You are far from the only one who dislikes the GPG exemption. Some other comments:

* "What about all us little investors who don't have GPG's muscle? It amazes me how this Government can propose a regime so obviously inequitable and unjust."

* "While I applaud GPG for putting up a needed fight and the Government for listening, striking special deals with companies and sidestepping the average New Zealander is a disgrace. If GPG gets five years of grace with this insane proposal, we all should. They are clearly making this thing up as they go."

* "If one can view GPG as Goliath and they can appeal to the Government, who can David at the other end of the scale appeal to?"

As far as submissions go, don't give up. The same goes for the many other readers who have made excellent points. Whether or not your letter is published, I suggest you submit it to the Government before July 7. Submissions can be emailed to sc-fe@parliament.govt.nz or mailed to: The Finance and Expenditure Select Committee Secretariat, Bowen House, Parliament Buildings, Wellington.

A ROUND-UP OF READERS' RESPONSES

Last week, I waited all week for your promised page on this new investment tax. Instead there were four columns on your personal ideas for a new system of capital gains taxation. I was disappointed.

Like thousands of elderly accountant-free investors, I don't know what to do about my overseas shares because comprehensible information is so scarce. Such as, when does this become law? You are the financial writer who addresses the questions we need answered. Your page is always relevant and understandable. We rely on you.

Sorry if you feel let down. I'm concentrating on the big picture now, in the hope the proposals will be changed before they become law, which is expected to be next April 1.

Once the law is finalised - well before it comes into effect - I will give guidance on what you should do.

We are a business with a staff of about 60 people and we pay the equivalent of two factory staff wages in annual accounting fees despite the fact that I am myself an (old) chartered accountant and we have two fully competent accounting people in the office.

The lower taxation marginal rates are, and the more simple the tax rules, the less most ordinary folk will do to avoid just taxes.

A good argument for simplicity. If the proposals go through, your accounting fees might rise to the equivalent of three or more staff.

If you are considering supporting a capital gains tax you should also consider a capital gains tax refund. That is, if your asset drops in value, as does happen, the tax department should give you money back. Now this is where it gets difficult.

In any capital gains tax system I know about, losses offset gains. If you have more losses than gains, you carry them over so they offset future gains. That's the only way it can be workable.

This tax system will soon send us away as tax refugees when just three years ago we were sought and welcomed as immigrants.

If we put this situation in the New Zealand context (ie property), every home owner would be assessed a tax on the annual appreciation of their property even though they had not sold the property. Where would one find the money to pay the tax? Sell off one bedroom? Of course not ... it is insane, as is the present proposal.

And how can the Government say that those with assets of greater than $100,000 are wealthy? Perhaps they ought to get out a bit more.

A thought-provoking comparison with property. And your point about the $100,000 cut-off is echoed by many.

Naturally I would prefer not to pay any capital gains tax but acknowledge that NZ is the only civilised country that does not have it. I only ask that it be applied fairly.

My neighbour invested in letting property, sold it two years later and bought a fancy car with the profit. In doing so, he helped to inflate house prices and swell imports. I am doing what Michael Cullen wants, saving for retirement and spreading my investment to overseas equities as well as New Zealand. My neighbour's profit is tax free and I am crippled with tax.

Also, the tax should apply to realised gains, not unrealised gains. In that way I have a chance to spread my liability and pay my tax when I have the liquidity to pay. Please do not let this issue go. Only by publicising the true implications of the proposals will a fairer tax ensue.

If your neighbour didn't pay tax on his gains, it sounds as if he should have.

As another reader says: "The problem with the current system is that the IRD does not clarify the boundaries and it does not implement the law, which leads to people being willing to push the boundaries further."

This is what happens in sport - you play to the way the ref rules."

Nowhere in the world has there been a successful capital gains tax to my knowledge. Success in this regard is a system that is stable, low cost to comply and non-distortionary. If you promote a capital gains tax you need to be able to come up with a system that would work.

Given that so many other countries have capital gains taxes, how about we study some of the better systems and pick out the best from them?

NZ was smart enough to introduce a single rate of GST without fear or favour. Having done that for consumption tax, it's time to lead the way on income taxes.

There now, that's a more positive attitude. And a good point, also made by other readers. We have done well with GST.

Mary, interesting idea. Not the capital gains tax but the belief that upon introduction this Government would then lower the taxes on other income. I can see the headline in the Herald now: "Cullen to Introduce Tax Cuts". Yeah right.

A common sentiment. As another reader says: "You must really live in la-la land. Politicians are always looking for ways to increase taxes not cut them." If, however, the Government was picking up a whole new source of revenue, who knows what might happen?

Your reply and proposed capital gains tax, which would lower the taxes of less wealthy people, makes sense. Do I have the right to elect you as the Finance Minister.

Thanks but no thanks. It's all Michael Cullen's.