Thursday 24th January 2019
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Accounting industry body CPA Australia is calling for changes to the capital gains tax as proposed by the Tax Working Group. It says the system in the draft report could “stymie investment, business and jobs growth”.
CPA Australia executive general manager Craig Laughton says members - including approximately 2,000 accountants in New Zealand - have several concerns about the Tax Working Group’s initial report. These include:
- the fact it does not include “grandfathering”, meaning the new regime would also apply to capital assets acquired before the date it comes into effect;
- lack of clarity in terms of valuation of pre-CGT assets;
- no CGT discounts. Australia, for example gives a 50 percent discount for individual taxpayers who hold a taxable asset for at least a year;
- the apparent exclusion of Portfolio Investment Entities (PIEs);
- the way the report appears to favour KiwiSaver over other ways of saving for retirement.
CPA Australia sent a supplementary submission to the TWG last month, with a number of proposals and recommendations. The organisation hopes these will have some input into the final recommendations, due for release in February.
Laughton says of the two capital gains tax methods discussed in the interim report, CPA members prefer a regime based on actual realisation of assets.
“The RFRM [risk-free rate of return] model, while simple in many respects, has the fatal flaw of assuming all assets always increase in value, which is obviously not the case. Consider for example the recent economic losses incurred by the taxi industry caused by the introduction of ride-sharing services,” Laughton says in his submission.
“CPA Australia is not aware of any other OECD country that applies CGT in this manner, and members remain opposed to taking unrealised gains.”
Laughton says valuation of assets is critical, with several issues needing clarification. For example, CPA says the government needs to develop “a robust valuation methodology” to deal with problematic areas like how to value goodwill in services businesses. It’s also not clear whether legal rights and options are to be counted as CGT assets.
Meanwhile, Laughton says there are considerable risks if the Tax Working Group decides to exclude Portfolio Investment Entities like managed funds and retirement schemes.
“This necessarily would introduce a two-tier investment community, one that invests in PIEs and one that invests directly in shares on the NZX. The latter would be disadvantaged. They would not only be caught by CGT but would potentially have to file annual tax returns, which is a considerable administrative burden."
He says it’s hard to quantify what the damage to the capital markets might be, but “the risk is severe”.
“New Zealand is a net importer of capital and the proposed distortion would almost certainly impact inflows. It could also encourage businesses to avoid listing on the NZX and seek a foreign listing instead.
“It is also worth noting that the PIE regime was explicitly designed because New Zealand does not have a CGT.”
Coincidentally, the NZX and the Financial Markets Authority today announced a formal review - Capital Markets 2029 - to investigate the woeful slump in equity listing numbers on the NZX. The number of equities securities on the exchange have fallen from 173 at the end of 2015 to 138 now.
Laughton says any capital gains tax needs to be wary not to make the situation worse. He says the Tax Working Group should make changes to the Fair Dividend Rate (FDR) regime. “If not, the playing field would be tipped in favour of foreign stocks to the detriment of New Zealand companies.”
Finally, CPA Australia weighs into the retirement savings debate, saying the interim CGT report appears to favour KiwiSaver over other ways of saving for retirement, and also that the proposed regime seems to have “given little thought around incentives to encourage retirement savings”.
The Tax Working Group is led by former deputy Prime Minister and Finance Minister Michael Cullen. It released its initial recommendations in September last year. Any final CGT would not be considered until after the next election in 2020.
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