KiwiSaver funds face unrealised capital gains tax on NZ and Aussie shares
By Pattrick Smellie
Feb. 21 (BusinessDesk) - Managed funds, including KiwiSaver schemes, will pay unrealised capital gains tax on changes in the value of the New Zealand and Australian shares if the recommendations of the Tax Working Group applying to portfolio investment entities is applied.
Such funds should be "taxed on their Australasian shares on an accrual basis," the TWG recommends, meaning tax would be payable or available for refund if a fund recorded gains or losses in the value of the Australasian assets in its portfolio even if they had not been sold.
However, sharemarket operator NZX is warning that change "would narrow participation in the New Zealand market".
The rest of the capital gains tax proposals released today recommend applying the tax only on 'realised' capital gains, which are measured when an asset is sold.
However, fund managers are already used to the taxation of unrealised gains on assets, mainly shares, bonds and property, held in other countries and are understood to have advised the TWG that taxing Portfolio Investment Entities on realised gains from the sale of New Zealand and Australian assets would be an administrative nightmare.
Nonetheless, it means that the 15 percent or so of Australasian assets that a typical 'balanced' KiwiSaver fund would hold will be subject to tax when previously they weren't.
The TWG recommends offsetting this impact for people on low and middle incomes in KiwiSaver schemes by rebating the tax employers pay on their contributions to employees' schemes back into the employees' scheme. The group also recommends letting low- and middle-income earners pay the lowest personal tax rate, 10.5 percent, on a larger proportion of their income.
"These measures would help offset any negative effects arising from an extension of capital gains taxation," the group notes.
NZX issued comments opposing the proposals, which it said would "discourage investment in New Zealand businesses and stunt the growth of our capital markets".
"New Zealanders are already taxed on income used to acquire shares. Being taxed twice would be unfair," chief executive Mark Peterson said in emailed comments. He feared the changes would lead to increased offshore investment by New Zealand individual and managed fund investors.
"The recommendations outlined today are not fair on New Zealand businesses and may pose risk to economic growth," Peterson said.
A founder of the InvestNow platform that allows investors to pick their own managed funds said the proposals would "skew New Zealand investors away from local assets, distort the KiwiSaver market and mangle the portfolio investment entity regime if introduced."
Taxing 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," said Anthony Edmonds. He noted it was TWG chair Michael Cullen who had introduced the PIE scheme in the 2000s when he was Minister of Finance in the Helen Clark Labour government.
The proposed changes risked "unintended consequences," said Richard Stubbs, a co-founder of Castle Point Funds Management, whose Ranger Fund was nominated this week for the second year as fund manager of the year in the New Zealand domestic equities category.
Leaving foreign shares under the fair dividend rate method "could disadvantage New Zealand share portfolios and see more KiwiSaver funds moved offshore," he said.
The TWG also recommends that individual investors claiming capital losses upon sale of an asset should be required to ring-fence those losses to prevent them being used to offset income from other sources.
Conversely, the group recommends against ring-fencing losses by investors in residential rental property if their capital gains are to be taxed.