Capital Gains Tax lightning rod means significant other recommendations ignored

Nau te rourou, naku te rourou, ka ora ai te iwi

With your contribution, and mine, the people will prosper

The Tax Working Group’s final report has been out for a week now. Even after all that time, the politicians seem to have forgotten that Capital Gains Tax was just one recommendation in more than 100 made. So bent have they been on attacking/defending the recommendations, that the media coverage has been dominated by National Party leader Simon Bridges, A.C.T. Party leader David Seymour on the attack, Prime Minister Jacinda Ardern and Treasurer Grant Robertson on the defence. But what about the other 100+ recommendations?

This report, to be clear is not a compulsory check list of things that the Government needs to do. They are just recommendations based on a nation wide attempt in 2018 to gather from the public what would make a fairer and more just taxation system, that included a two month public consultation.

Those recommendations covered:

  1. Capital gains and wealth
  2. Environmental and ecological outcomes
  3. Taxation of businesses
  4. International tax
  5. Retirement savings
  6. Personal income tax
  7. Future of work
  8. Integrity of the tax system
  9. Administration of the tax system
  10. Charities
  11. G.S.T. and financial transaction taxes
  12. Corrective taxes
  13. Housing

I shall cover in the next few paragraphs a selection of recommendations from #2-13 – due to the heavy coverage elsewhere, there shall be none on Capital Gains Tax.

Environmental taxation is a regulatory tool that can be used as an incentive or disincentive in order to achieve certain environmental outcomes. The T.W.G. recommendations cover greenhouse gases, water abstraction and pollution, solid waste and transport. Interestingly, it does not appear to cover air pollution, despite aerial dispersal of dioxins and so forth being a significant issue.

Retirement savings are a constant concern, particularly for lower income earners who have to work longer in many instances in order to afford retirement. The recommendations include refunding the employers superannuation contribution tax for those earning less than $48,000; increasing the member tax credit from $0.50 to $0.75 for every $1 of contribution.

G.S.T. had concerns raised about it by the public. These were acknowledged by the T.W.G., but drew the conclusions that the existing rate should not be lowered on the grounds that the reduced rate would not target as lower income earners as welfare transfers or personal income tax changes (lower and middle income earners). Nor does the report recommend the removal of G.S.T. of certain items such as food and drink.

Housing is an area that one might have expected to come under C.G.T. However, this concerns residential land. There were two recommendations pertaining to vacant residential land. One was to recommend that the Productivity Commission inquiry considers a tax on residential land. The second was that vacant residential land be a local tax rather than a national tax.

This article is just a very brief look at a few of the range of taxation concern areas that were addressed by the T.W.G. – and which the politicians ignored, quite surprisingly given that several addressed some of the wealth that they were arguing over.



Learning from the Mainzeal collapse

Today several former Mainzeal company directors were ordered to pay N.Z.$36 million in a high court ruling. The ruling is the latest phase of a long running saga that started with Mainzeal going into liquidation in 2013 owing $110 million.

At the core of the problem is the fact that the boardroom directors of the company knew full well that it was in a parlous state, yet they continued to allow it to trade until it imploded. Four directors have now been ordered to pay $36 million in damages including former Prime Minister and National Party leader Jenny Shipley.

So how did Mainzeal get to this point and what lessons does it have for those in corporate positions of responsibility?

A Richard Yan was working for Mainzeal during the school holidays in 1981. In 1996, after completing a business degree, he oversaw the takeover of Mainzeal and the creation of Richina Pacific Group to manage his business assets. During the pivotal year of 2004, several things happened:

  1. Dame Jenny Shipley was asked to join
  2. Capital was extracted from the company to prop up business assets in China
  3. Mainzeal made a small profit that was wiped the following year, and then see-sawed in 2006-07

In 2009 PriceWaterhouseCooper had concerns about the solvency of Mainzeal. The following year Dame Jenny Shipley raised concerns about the worsening balance sheet. By the end of 2011 the working relationship between Mainzeal and the rest of Richina Pacific Group had deteriorated to the point that Ernst & Young were commissioned to do a governance report on Mainzeal.

And all this time fresh attempts to recapitalize Mainzeal were being attempted using various means, such as a pre-paid goods agreement, getting money back from China based assets and setting up entities in New Zealand to distract claimants.

Perhaps the death knell was a spat with Siemens in 2012 that saw them withhold payments over work upgrading the electricity links between the North and South Islands. Coupled with leaky building claims targetting Mainzeal work and the possibility Mr Yan’s wife might be made bankrupt if the company collapsed – leading Mr Yan to warn he would walk if his wife was not released from a guarantee she made to B.N.Z.

The final blow was struck when an emergency meeting in January 2013 saw a motion passed to invite B.N.Z. as the major bank involved to appoint receivers. It immediately suspended loans and shortly after the company caved in.

For years until being liquidated in 2013, it continued to trade, during which time it racked up $110 million in debt that will largely never be recovered.

The directors might have been ordered to pay $36 million, but as holders of liability insurance, it will come out of their company and not their personal pockets. Clearly not smart enough to realize that Mainzeal was in trouble, but smart enough to make sure their pockets were protected by insurance.

For me this is not good enough. If a person or company continues to trade and rack up debt despite knowing it is not in a position where it can realistically trade, then when balancing the books – or what is left of them, the creditors should be able to require the forfeiture of luxury assets to make up the difference.

Of course this would bring howls of rage from the defendants, highly expensive attempts to get the case thrown out in court and warnings of doom and gloom. With similar certainty, the allure of a directorship on a corporate board and the opportunities to make significant money would be enough to overcome the doom saying.

Historic examples of collapses make me wonder if New Zealand has learnt anything from corporate failure. Based on those examples, which include Bridgecorp in 2007 owing $490 million, Equiticorp in 1989 with $1.4 billion in assets and $550 million in debt, among others I think the answer is a resounding no. Whilst not as big, public expectations around the application of the law, the need for greater accountability and the Global Financial Crisis of 2007-2009 have all focussed the spotlight on these types of businesses in ways I think some with influence do not like.

Latin America: the continent unknown to New Zealanders

In a world where New Zealand’s closest neighbours are a large continental nation to the west of us, and a host of small island nations to the north and northeast, it is easy to forget a large land mass 11,000 kilometres to our east. The dozen or so countries that make up South America are little exposed to New Zealanders by the media and not often referred to by politicians.

So, what is Latin America to New Zealand, in terms of trading, culture and politics? What can we offer them and what can we learn from these countries?

Whilst at University my international horizon was broadened hugely by meeting an array of people, many of whom I am still good friends with today. They include a Colombian Masters of Science student and her sister who is well known cellist, a Peruvian couple who were married shortly before I met them. She was doing a Masters in Law and he a PhD in seismic engineering and who now live in Los Angeles as well as a Uruguayan couple.

Much of my still very limited knowledge about Latin America was gained from them. I suspect I am not the only New Zealander who considers their knowledge of this amazing and diverse continent to be badly lacking.

But I think there is much that New Zealand can both learn and give to Latin American nations. We share some commonalities with Chile, Peru, Ecuador and Colombia, being on the boundary of two tectonic plates and thus prone to active volcanism and large earthquakes. Football is a growing sport here and a dominant sport among their peoples as well.

In terms of what we can actually trade with them, Chile’s market liberalization enabled a greater range of goods and services to flow in and out of the country. Whilst marked by the scars of the Pinochet regime which New Zealand did not sever links with, Chile and New Zealand have concluded a trade agreement for a range of goods. The two countries have holiday working visas so that peoples of both countries can work in the other whilst travelling.

Another country marked by violence is Colombia. New Zealand’s relationship with Colombia is somewhat limited, but improving. A New Zealand embassy opened in Bogota in 2018. New Zealand helped Colombia realise the agreement between the country and the Revolutionary Armed Forces of Colombia (F.A.R.C.) to end their involvement in the armed conflict that killed hundreds of thousands of people and upended many communities. There is also limited, but growing trade between the two nations.

Until New Zealand opened an embassy in Argentina in 1977, relations between the two countries was very limited. New Zealand cancelled its diplomatic relationship with Argentina during the Falklands War. It restored the relationship in 1984. Since then Argentina has become a significant Latin American trading partner. Argentinian and New Zealand rugby teams play each other on an annual basis and both countries are working together for preservation of the Southern Ocean.

New Zealand and Latin American countries generally collaborate on subject matter such as education – New Zealand universities are being encouraged to develop links with their counter parts in several countries – and law. In the case of the latter international law including human rights, the non proliferation treaties for weapons and peace keeping are the key focus points.

I see promise in this relationship. Latin America and New Zealand have a common responsibility to look after the Southern Ocean and the Antarctic. Working to preserve fish species from over fishing, the prevention of mining on the frozen continent and the improving of human rights on board trawlers are all things those countries and New Zealand can collaborate on.

E.Q.C. plunder example of New Zealand corruption

When one thinks of the Earthquake Commission (E.Q.C.), s/he might think of a body that has failed Cantabrians and New Zealand at large miserably. New Zealanders might look at the politics of it over the last 8.5 years and wonder why we still have it. But what if I told you at least in the 1990’s institutional ineptness was not the cause of the problems, so much as politicians using it as a lending body for their big projects?

This is a rare moment in time when one might have a shred of sympathy for the E.Q.C., which many New Zealanders viewed, perhaps incorrectly as a rainy day fund for natural disasters. The incorrect perception would stem from the fact that on the day of a major disaster, a substantial chunk of the rebuild fund comes straight from Government coffers, and usually at the expense of other major projects – roading, hospitals, schools, new social welfare initiatives and so forth.

E.Q.C. did not ask to be “plundered” as one commentator put it, but thanks to a decision taken by the fourth Labour Government in 1988 to privatise E.Q.C., it was left to control its own finances, appointments in processes in accordance with the Earthquake Commission Act 1944. In other words it was basically told it could do what it wanted. And during the 1990’s that happened, with the billions of dollars that was meant to be under their control in case of a major earthquake, being used to fund Government budgets for non related stuff.

Perhaps too, the public were a bit lazy in terms of paying attention to E.Q.C.’s problems. Perhaps they did not understand what was going on, or simply adopted that damaging New Zealand attitude “she’ll be right mate”. After all no big earthquakes exceeding magnitude 7.0+ would strike on land at all in the 42 year period between the Inangahua earthquake of 1968 and the Darfield earthquake in 2010. Memories were short, complacency was setting in. Why bother about something that has not happened in my life time, many asked.

On 04 September 2010, the magnitude 7.1 Darfield earthquake and its aftershock sequence put the E.Q.C.’s 22 permanent staff and 2 part time staff to the test. Very quickly – within a couple of days – it was very obvious that the magnitude of the disaster was in excess of anything that they could handle. Over 100,000 individual claims from businesses and private owners alike were in bound. The internal filing system was swamped and staff did not know where to start.

Worse was to follow. E.Q.C. were still struggling with these 100,000 claims and the attendant problems that went with them when Christchurch was slammed by the 22 February 2011 aftershock. Whilst an aftershock technically, it was an event in its own right by virtue of the damage done, lives lost and vastly more complex problems now arising.

Now, having had three major earthquakes costing New Zealand billions of dollars and the very real knowledge that in the future there will be more, one has to wonder whether E.Q.C. can be built back up in time. With faults in north Canterbury having been stretched by the Kaikoura earthquake and the Alpine Fault waiting in the wings with a magnitude 8.0+ earthquake that will cause disruption all over the South Island and much of the lower North Island, the urgency is there.

I am not sure re-nationalizing the E.Q.C. will work, or whether it would have the desired effect in time. A renationalization would require the Government to take back financial and procedural oversight of the organization. In a political sense this carries the obvious risk that a future Government would not then privatize it a second time.

The public might despair of politics, especially when it comes to politicians with their snouts in the public fund trough. However it really would be a good idea given the monsters waiting in the wings to start paying attention to what is happening to E.Q.C. now.

Analysis of the Capital Gains Tax

In the days since the Government Tax Working Group announced its recommendations, there has been a lot of discourse on them. Some of the discourse has been highly constructive, but there has also been a lot of ideological, emotionally driven commentary which has ignored the subject matter.

In light of that I have tried to write an analysis that is politically neutral.

It is important to note that New Zealanders buy property as an investment because it is one of the few ways of developing ones own wealth, without a significant tax measure applied. When I say an investment I am not talking about the family home, something everyone would like one of to be their own. Nor am I talking about the holiday home that might be a crib on land with a total value of $100,000. Rather I am mentioning properties that are going to be used in the rental market and have active tenants paying rent/board.

The idea of owning a rental property permits the owner to have control of the house and be paying off any mortgage that they might have without actually having to use their own funds.

The more properties of this nature that they own, the great the return per week from tenants. When the landlord exits the market and sells all of their properties, they are able to take all of the appreciation without having to pay taxation on it. Not surprising then that people with a bit of money to spare have flocked to the New Zealand market, invested in properties. However this has had a down side as in turn it has driven up property prices, which have forced a number of potential buyers from the market. In order to pay for those properties or gain appreciation on them, the matching rents have risen as well, which has put the squeeze on those with limited income means.

Contrast this with putting their savings into something like the share market or a long term deposit in a bank account, where it can be taxed. The share market obviously has a degree of volatility reflecting the trading environment of the day. How well the shares do depends on how will the company performs publicly – oil companies for example experience fluctuations in oil prices depending on the ability to supply the market, geopolitical conditions in the Middle East.

In terms of the long term deposit, the holding bank announce . However interest rates have stayed very low since the Global Financial Crisis, making it difficult to accrue significant interest. Some banks have interest rates so low that they are what I call acidic in that one actually starts paying the bank to have ones money invested in them, and the net outcome is a loss. The taxation of these methods of developing ones wealth poses a question:

If they get taxed, then why should the method of wealth development that is owning secondary properties  for the purpose of money gain not subject to tax?