What Cullen’s CGT means for fund investors

21 February 2019

Cost, confusion, complexity: what Cullen’s CGT means for fund investors

The Tax Working Group (TWG) proposals released this morning would skew New Zealand investors away from local assets, distort the KiwiSaver market and mangle the portfolio investment entity (PIE) regime if introduced, according to the founder of the country’s largest direct-to-consumer managed fund platform.

Anthony Edmonds, InvestNow founder, said while the TWG final report includes some welcome reforms, overall the capital gains tax (CGT) recommendations would add cost, complexity and confusion to New Zealand’s relatively efficient managed funds market.

“For example, the TWG’s plan to increase tax on New Zealand shares by applying CGT while leaving the fair dividend rate (FDR) tax for offshore shares unchanged would naturally drag capital offshore at the expense of local assets – at a time when New Zealand needs to fund major infrastructure projects,” Edmonds said. “In trying to discourage people from investing in residential property, the TWG has created a tax disincentive for Kiwi shares, which can only distort investment allocation decisions.”

Essentially, the TWG recommendation to tax unrealised capital gains on PIE funds marks a return to the ‘bad old days’ when Kiwis paid more tax on managed funds than direct share investments.

Edmonds said the only balancing factor could be the additional complexity that direct share investors might face as a result of the CGT proposal.

“Regardless of how you invest, the TWG’s CGT proposal adds to complexity and increases the amount of tax you will pay on your savings.”

The TWG proposal to carve out different tax rates for KiwiSaver funds compared to other managed fund PIEs would create a loophole for those aged over 65 as well as creating an expensive administrative headache for the industry – pain that would ultimately be felt by consumers.

“Given people over 65 can use KiwiSaver like a normal managed fund - investing and redeeming at will - this favourable tax incentive would inevitably see a huge flood of post-retirement funds to the tax-preferred system over standard PIE funds,” Edmonds said. “Every investment manager in the country will suddenly want – and probably need - to be a KiwiSaver provider.”

Currently, the PIE and KiwiSaver regimes are neatly-aligned with client tax rates – via the prescribed investor rate (PIR) system – creating an administratively simple solution that taxes investors appropriately regardless of which vehicle they use.

However, Edmonds said the TWG proposals to impose different tax rates for KiwiSaver and standard PIEs would require investment managers and fund administrators to build complex and costly new systems to accommodate the two-tiered taxation regime.

“And that’s complicated further by the TWG idea to introduce another multi-tiered incentive with the employer superannuation contribution tax (ECCT) for those who earn under $48,000 per year set to be scrapped,” he said. “Undoubtedly, this proposal creates some very tricky administrative problems for providers – as well as new ‘border’ issues for the IRD to police as many New Zealanders will manage their tax affairs around these types of incentives.”

But the TWG final report flags at least one sensible proposal, Edmonds said, namely the suggestion to ditch the foreign investment fund (FIF) rules that allow individual investors to game the system by switching between FDR and comparative value (CV) accounting for their offshore equities holdings.

“Giving individual investors the option to switch between FDR and CV accounting each year depending on which method will result in less tax is a clear risk to government revenue,” he said. “Importantly, PIE funds are required by law to use the FDR approach to levy tax on offshore equities. “It’s good to see the TWG has called on the government to consider shutting down this loophole – but it should have been a formal recommendation.”

Overall, though, Edmonds said the TWG proposals would add complexity and expense for New Zealand managed fund investors – who, including KiwiSaver, represent more than 60 per cent of the population.

“New Zealanders currently have about $100 billion in retail managed funds, with more than $50 billion in KiwiSaver invested on behalf of close to 3 million people,” he said. “The government will have to think very carefully before shaking up what has been to date a popular and successful system.”

About InvestNow

Launched early in 2017, the Wellington-headquartered InvestNow manages approximately $250 million on behalf of 10,000 plus clients. The online platform offers clients free access to a range of about 100 funds managed by 17 underlying investment firms across a range of asset classes and countries. In October 2018 InvestNow began offering a suite of BNZ term deposits, adding SBS to the mix the following month. InvestNow members pay no platform or administration fees with a low investment minimum of $250. In March 2018 the business took over the direct fund investment arm of Rabobank NZ.

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