Tax tipped to turn away

Mike James* is just the sort of immigrant New Zealand wants. He has business skills, money to invest and is well on his way to creating a successful business here.

However, James, who immigrated with his family from the UK, still owns shares in a family business back home, and fears that a proposed capital gains tax (CGT) on that investment will force him to leave New Zealand.

"My accountant at Deloitte in Wellington calculated that my tax liability under the proposed changes will increase by approximately 72 per cent, which is crippling, and unjustifiable."

One of the biggest complaints from migrants with overseas investments is that the proposed tax, which is timetabled to come into effect on April 1 next year, is on paper gains instead of on the sale of the shares - as would happen in countries such as the US.

James says he would never sell his stake in the business, which has been in his family for generations. "To be advised that I will be taxed on unrealised gains over the tax year makes my stomach churn.

"I have brought my family over from the UK making a commitment to live here for the rest of our lives. I have invested a large amount of money already into New Zealand."

The business plan for his New Zealand venture relies on his earning dividend income from the UK during the early phase. But with his accountant estimating that he will pay $30,000 more in tax each year, James cannot see how he can afford to fund the company's growth. "I will be in a situation where I can't afford to live," he says.

James wonders how the new CGT proposals look to those many skilled workers looking to emigrate to NZ.

" I certainly know that if I was still in the UK I would seriously have to reassess our options of moving here."

Finance minister Michael Cullen points out that new international recruitment rules will provide a tax holiday on most forms of foreign-sourced income for up to four years for new immigrants or Kiwis that have been overseas for 10 years or more.

For those that want to bring all of their money into the country that is ample time. But it means little to those who, for investment reasons, want to leave their money overseas.

This is an issue that concerns Phil O'Reilly, chief executive of Business NZ: "Any change to investment tax that looks to distort the playing field in favour of domestic investment ahead of international investment could jeopardise skilled workers moving here. That's especially so, considering New Zealand's potential base for investment is by world standards small."

At the same time it is the government's avowed intention to attract skilled migrants and overseas-based Kiwis to the country.

Immigration Minister David Cunliffe introduced a bill to parliament in early April aimed at streamlining the immigration process for desirable migrants.

However Cunliffe was apparently not involved in the discussions over CGT. A spokesman for the minister commented: "I am advised that Immigration was not involved with the grey list tax matter in any way. Therefore I am not sure how the minister can helpfully comment. It was not an issue he was involved in."

Those that will be hit hardest are the immigrants and returning Kiwis who live in "grey list" countries that are currently exempt from CGT: Canada, Germany, Japan, Norway, the UK and the USA. Investments in Australia will hang on to their exemption.

But with 42 per cent of skilled migrants to this country under the points system coming from the UK, migration from that country is mostly likely to be hit.

Anyone in doubt should listen to the words of Juliet Connolly, director of UK Expat Limited, a tax specialist, who advises immigrants to and migrants from the UK on international taxation issues.

UK-based Connolly, says the proposed legislation will have an effect on whether she can recommend New Zealand as a destination to successful business people looking to migrate.

Until now, says Connolly, wealthy UK people looking to emigrate and were unsure whether to choose Australia or New Zealand, have tended to favour New Zealand because of its tax regime. "This is going to be a very big sticking point with wealthy individuals who are using migration as a tax planning device," she says

National's finance spokesman John Key believes the tax rules will be a "major turn off to attracting international talent to come to New Zealand".

Key views skilled workers as human capital that is highly in demand and may prefer to go elsewhere if the tax take is too high here. "Australia is taking an aggressive view to attracting talent," says Key.

What's more, says Key: "New Zealanders' travel and that is an accepted part of our culture. Surely it should be part of (the country's) strategy to attract those people to come back.

Hamilton-based Jonathan Grey* is just the type of person Key refers to. Grey, a virtual worker, makes his money in the UK, but lives in New Zealand. Currently New Zealand law requires that he pay tax on his overseas income, which he doesn't dispute.

Grey says he left New Zealand with a finance degree, a suitcase, and a little cash - hitting London Tom Sawyer fashion to make his fortune, which he duly did. He also has a large investment portfolio that he built up whilst on a 13-year-long OE.

He does not believe it would be in his economic interest to repatriate the investments home. Grey, who is semi retired, says he does not have sufficient income to pay capital gains on investment portfolio every year.

Grey's biggest complaint is that he will be charged capital gains tax on paper gains, not just when he sells the shares. He also views the proposed tax as penalising him for being successful.

He is now deciding if he should relocate himself to another part of the world to escape the tax; structure his finances to legally avoid the tax; or simply "skulk in the shadows" and fail to declare his investments. "It is 60/40 that we will go somewhere else where I don't have to incur the tax burden," says Grey.

"They want people like me back, and then they want to penalise me for that time away when I made myself better."

Ironically the National Party's finance spokesman John Key, who had a successful career in London, at Merrill Lynch admits that he has significant holdings of Merrill Lynch shares and options, which could be subject to a sizeable tax liability under the proposed system.

*The names in this article have been changed.

How the new rules work

The new rules are complex and aren't set in stone yet, but in essence, mean that investors with money invested in overseas shares will need to CGT on 85 per cent of the rise in the fund or share price over the previous 12 months.

If you've bought those shares directly in an overseas market, then each year five per cent of the gain will be taxed and the rest rolled over until the investment is sold when you pay CGT on the remainder of any gain. Any losses cannot be claimed against your income tax, just rolled forward.

Even a currency movement could result in people paying CGT on their investments because the value has gone up in New Zealand dollars.

Individuals are exempt if the original purchase price was less than $50,000 for an individual or $100,000 for a couple.