6. JOHN KEY (National—Helensville) Link to this
to the Minister of Finance
What will be the formula for New Zealand residents calculating their tax liability if they hold shares outside of New Zealand or Australia after 1 April 2007?
Hon Dr MICHAEL CULLEN (Minister of Finance) Link to this
That would depend on the nature of the resident, the nature of the company invested in, and the total cost of the investment held.
Does the Minister support the New Zealand Superannuation Fund’s diversified approach to asset allocation, where the vast bulk of equities are owned offshore; in which case, why is he proposing a capital gains tax on ordinary Kiwis that will penalise them for everything he says he supports the New Zealand Superannuation Fund undertaking?
Hon Dr MICHAEL CULLEN Link to this
All managed funds have investments offshore, primarily because the New Zealand sharemarket is relatively small. But the member, of course, continues to make a fundamental misstatement. At present, a 100 percent capital gains tax applies to investment in all countries outside of eight “grey list” countries. That will be significantly reduced under the new regime, and that will encourage diversification. The member is arguing that we should continue to advantage investment into Germany compared with India.
I am glad the Minister answered in that way, because does he understand that currently the capital gains tax - exempt, “grey list” countries comprise 80 percent of the world’s market capitalisation of listed stocks—80 percent of the world’s capitalisation is in those companies—which leaves only 20 percent on his blacklist, yet, after his latest “envy tax”, that 80 percent will now shrink to a mere 2 percent; armed with this knowledge, does he still think it is such a great idea to introduce the new rules, which replace a bias against 20 percent with a bias against 98 percent?
Hon Dr MICHAEL CULLEN Link to this
No, the advantage is in relation to New Zealand and Australia only, because they are treated as a single economic market—and that member will go up to Auckland on Friday and pretend to support that, but in this House, of course, he will oppose it. The reality at the moment is that the “grey list” regime was developed on the theory that those countries could be relied upon to tax at source. In practice, that is not happening in many instances.
Hon Peter DunneWhat reports, if any, has the Minister seen of positive industry reaction to the proposals that were recently announced?
Hon Dr MICHAEL CULLEN Link to this
I have received a number of such reports, and, particularly, from those who know something about these issues. Ernst and Young describes the change as a “triumph for tax neutrality”. The NZX Chief Executive, Mark Weldon, said that the change would be positive for New Zealand capital markets. Carmel Fisher, of Fisher Funds Management, stated that the tax changes are great news for investors and for New Zealand capital markets. Jo Doolan, in the Independent, wrote: “It is evident the Government … moved a long way in trying to make the rules more user-friendly.” The only people opposing this are a British-based company, Guinness Peat Group, its paid agents, and the National Party.
Peter BrownIf the legislation is enacted along the lines reported, will a person be able to avoid any capital gains tax liable on American shares by selling those shares and transferring the money to Australia?
Hon Dr MICHAEL CULLEN Link to this
Yes, because, of course, the value of those shares has not been repatriated to New Zealand. I might add that, given that the American context is of specific importance for countries involved in what might broadly be called new-technology venture capital areas, talks are well advanced on ensuring that those kinds of companies will not be adversely affected by the changes.
Dr the Hon Lockwood Smith Link to this
Will this new capital gains tax apply to new migrants and returning New Zealanders who qualify for a 4-year tax exemption on foreign income; if not, once the exemption expires, will capital gains be calculated on an increase in value from 1 April 2007 or from when the exemption expires?
Hon Dr MICHAEL CULLEN Link to this
My understanding is that that would apply from the date of the expiry of the exemption, but I will check on that and get back to the member. The member, however, does help with a very important point to clear up a misunderstanding. The new regime applies prospectively only from 1 April next year; the gains are not backdated from the time of purchase of shares. There has been a good deal of misunderstanding of that point within the public arena.
Shane JonesHon Dr MICHAEL CULLEN Link to this
Contrary to the impression some people are trying to create, the proposals will cut tax on investments by a net $110 million a year by reducing tax advantages for investors using managed funds—primarily those on lower incomes—
Hon Dr MICHAEL CULLEN Link to this
—which is why the “Young Pretender” is squeaking away over there; he is not interested in those particular people—and abolishing the tax on capital gains on New Zealand and Australian shares held via a managed fund, which at present are subject to a capital gains tax.
Can the Minister confirm that New Zealand investors’ liability under his new capital gains tax is not capped by his formula of 85 percent of 5 percent—the formula he wants everyone to believe—but that, rather, the formula applies to the total capital gains, once the assets have been sold and repatriated to New Zealand?
Hon Dr MICHAEL CULLEN Link to this
Effectively, what there is here is a rolling imputation credit along the way, and, on repatriation, that will occur. But, of course, what the member completely fails to point out, yet again, is that all investments in countries outside the “grey list” at the moment are subject to 100 percent capital gains tax. There is not a new capital gains tax; it is a rationalisation of the existing regime.
How much additional revenue will the Crown receive as a result of his cracking down on the salary sacrifice rules, and when this is added to the additional revenue from the abolition of all but Australia as the “grey list” countries, is it not a fact that, rather than cutting tax by the figure of $110 million that he was trumpeting before, in an earlier answer on this question, this policy is pretty much revenue neutral, like every Michael Cullen tax adjustment, and just like his business tax review will be when he slaps on his shiny new little payroll tax?
Hon Dr MICHAEL CULLEN Link to this
From 1 April there were very significant business tax cuts, which cost some hundreds of millions of dollars a year, and which were not in the least revenue neutral, but the member, of course, as usual, wants to avoid those particular things—a member who, in an interview on Saturday morning, could not even answer whether he believed in God.