Editorial: New tax treatment falls short

In most countries, a pool of local savings provides the lifeblood for economic growth. Such, unfortunately, is not the case in New Zealand. The lack of a savings culture, allied with an obsession with residential property, has created major headaches. Not the least of these is the manner in which local companies are being taken over, often by capital-rich Australian corporates, and the way in which the Stock Exchange now has a hollowed-out appearance. Any attempt to reverse this trend by encouraging saving should, in principle, be welcomed.

But that greeting can be sustained only if that endeavour achieves its purpose. And that is where the Government's much-anticipated overhaul of the tax treatment of investment comes unstuck. However well-intentioned the package, its effect may be not only distortionary but, to some degree, counterproductive.

The changes are obviously positive for people on lower incomes who invest in managed funds. They will no longer see the income from their savings taxed at a higher rate than their other income. And, if the managed funds hold shares in companies listed on the New Zealand or Australian stock exchanges, they will no longer face a capital gains tax if they sell those shares for a profit.

Read in conjunction with the new Kiwisaver scheme, this suggests a major fillip for local savings and a significant rebalancing of this country's allocation of capital. Certainly, the glee of the managed funds industry suggests a major encumbrance has been removed. But there must be a question-mark on how much of the funds' money will find its way to the New Zealand market. Given that Australia will be treated equally - reflecting the push for a single investment market between the two countries - will most of it end up across the Tasman? The size of the Australian market and the frail nature of its local counterpart support that conclusion.

The trade-off for the Government's largesse towards managed funds is tougher treatment of those with substantial direct shareholdings in overseas markets other than Australia. People who have invested more than $50,000 in equities in the likes of Britain, the United States and Japan will face a tax on 85 per cent of the average capital gain on those investments when they are cashed up and repatriated.

The intention is to strengthen the savings pool by encouraging people to quit their international investments and shift them to New Zealand or Australia. But again there may be unintended consequences. Why would investors be captured by the new treatment unless they had a strong need to repatriate the money? Would they rather not retain their investment in Britain or the US as a pool that they or their family could use in those jurisdictions? If so, that money will remain estranged from this country.

The Finance Minister made little attempt to disguise the politics of envy that underpin this package. Lower-income savers will be the beneficiaries and the wealthy the ones to suffer, even if not to the degree proposed in the Government's original plan. An approach based on this foundation has no place in any cogent tax system. Nor does the idea that the creation of harsh tax rules for some countries is a judicious means of encouraging investment in this one. The quality of the investment and the strength of the economy should always be the appropriate yardsticks.

The outcome of this package is likely to be disappointing. The Government has, to its credit, begun to tackle New Zealanders' saving deficiencies. But in this instance it has wandered down an unprofitable side road.