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There is life beyond the Bombays

Posted by Stuart Nash on November 1st, 2010

All this posturing, threats and huge budget promises re Auckland from their new councillors etc makes me shake my head in disbelief.

Akld is but one of many cities in this wonderful country and if Aucklanders think they have pre-eminent rights on all of our taxes then they need to pull their heads out from their nether-regions and get real.  New Zealand does well when all New Zealanders are thriving.

Having lived in Auckland and now back in the Bay, give me Napier any day!!  So yes my Auckland friends, there is life beyond the Bombays.

Filed under: Uncategorized
72 Comments

Bill English & tax cuts – the truth according to Bill

Posted by Stuart Nash on November 1st, 2010

Bill English admitted a couple of very interesting things at last Wednesday’s Finance & Expenditure select committee meeting re the $14b worth of tax cuts.

You know, the tax cuts that gave the wealthy substantial coin back ($1m = $1,000/wk extra in the hand), but those on the median wage minimal; and certainly not enough to cover the cost of increases bought on by rises in GST, petrol etc.  Those admissions were:

  1. ‘That the tax cuts aren’t stimulatory’.  Hold on a second: what was that Bill?? We are in the middle of a recession, and the govt spends around $14b on a measure that isn’t stimulatory!  Help me out here, because I don’t understand this one.  If this ‘switch’ was just about ‘rebalancing’ and not about economic stimulation and recession busting, then why not at least wait until the economy is firing again, and in the meantime, spend some of the $14b on getting the economy up and running!!!
  2. ‘That New Zealand is the only country in the world undertaking tax cuts like these’.  Yep.  Wonder why?  Perhaps because trickle down / supply side economic theory that these tax cuts are based on (and confirmed by Treasury Sec Whitehead) died with the dawning of the 21st C.  Perhaps because such theories have been disproven.  Perhaps because Bill English really is mismanaging the economy in the most expensive, worst, diabolical possible way.  Perhaps all of the above…!
  3. That he didn’t think people would start saving and paying down debt so soon’.  Groan.  There are about 1,000 books on JM Keynes, his theories, his philosophies, his thoughts, the implementation of his theories, philosophies and thoughts etc etc.  Know what – they all say that during a recession a govt shouldn’t give tax cuts to the wealthy because… the wealthy save and retire debt and it does nothing to stimulate the economy.  Just like has happened.  It’s not rocket science.  It’s always been out there – and it appears that every finance minister / treasurer in the western world read at least one or two of these books on Keynes; well, all except one Bill English.

Damn!!

Filed under: GST, Tax, Uncategorized, economic, economy, finance
12 Comments

Tax cuts – what sort of country do you want to live in.?

Posted by Stuart Nash on October 1st, 2010

Cartoon : Cost of living

Herald’s view this morning…

Today, many kiwis received tax cuts.  Here are some facts about this tax policy:

  • the top 10% of wage and salary earners get 42% of the tax cuts:
  • the bottom 20% get 2%. 
  • people on a $1,000,000 salary (according to the IRD, there are around 650 people who earn $1m or more) have just received around $1,000 per week extra: people on New Zealand’s median wage of $28,000 per year will get just over $4.63 after accounting for the GST increase.
  • the tax cuts will cost just over $4b per year, or $14.3b over 4 years. 
  • after accounting for the greater revenue due to the increase in GST to 15%, the government will still need to borrow around $1b to fund tax cuts.
  • New Zealand Institute of Economic Research (NZIER), in its Sept 2010 update said: “We estimate around 50% of households will be worse off than a year earlier as rising food prices, GST and other one-off charges more than offset personal tax cuts” (p8)

When I bring up the argument around fairness and equity, some say the top earners pay a disproportionate share of the tax therefore deserve tax cuts.  I don’t buy into this, because whilst the top 10% of tax payers do pay a disproportionate amount of the tax, they also earn around 32% of all income

But it comes back to the question of ‘what sort of society do we want to live in?’  Lets face it, New Zealand has a pretty good standard of living.  For example, our schools are well resourced and our hospitals are first world.  Due to universal superannuation, we have the lowest level of geriatric poverty in the OECD (2% v Australia’s 24%), our Accident Compensation system is generally acknowledged as a great model (well, it was until Nick Smith started butchering it).  All these, and many more, services are paid for from tax revenue.  The more money that is spent on tax cuts, the less there is to provide the essential services that New Zealanders have come to expect. 

In many cities, these tax cuts will increase the gap between the few that have a lot and the many who are struggling with higher costs associated with the increase in GST, ETS and 4.5% inflation.  This angers me greatly. 

Some of the country’s richest men have been responsible for causing the most harm to our nation and its citizens.  The sort of society I wish to live in is one where every citizen is treated with respect and dignity and is valued for who they are, not how much they earn.  This is what I will fight for as long as I represent you in parliament.

Filed under: GST, Tax, superannuation
84 Comments

National’s Tax cuts – is it fair?

Posted by Stuart Nash on September 27th, 2010

Is it fair that the top 10% of wage and salary earners get 42% of the tax cuts and the bottom 20% get 2%?

Is it fair that someone on $1,000,000 gets $1,000 a week extra in the hand per week, and someone on the median income of $28,053 gets $4.64 in the hand per week after GST?

Is it fair that a regressive tax is increased to make a progressive tax less so?

Is it fair that the Minister of Revenue gets a tax cut of around $140 per week in the hand whereas someone on the median wage in his electorate gets about $5?

Nope didn’t think so – and neither do the vast majority of New Zealanders.

Filed under: GST, Tax
113 Comments

GST off fresh fruit and veg

Posted by Stuart Nash on September 27th, 2010

Apple GST Poster distro

Today in Mana in front of a packed audience, Phil Goff announced the Labour policy of zero-rating GST on fresh fruit and veges once we become government next year.  The reasons for this policy are two-fold:

  1. at 15%, GST is no longer a ‘low rate’ consumption tax.  This regressive tax will now be at a level where it influences behaviour to the point where many people will be forced to make very difficult economic choices that have the potential to impact upon their health and well-being.  We recognise this and want to ensure that fresh fruit and vegetables are affordable to all New Zealanders. 
  2. NZ is now the 3rd fattest country in the world (behind US and Mexico).  The cost to the tax payer and the health system of obesity-related disease is around $500m per year.  It is time to do something about this.

In New Zealand, 75% of the people earn below the average income, and the cost of living is about to rise for everyone as a result of the increase in GST to 15%.  With inflation forecast to be around 4.5% next year, the ability of many kiwis to survive the resulting increases in the cost of living is hugely concerning for us.

GST at 15% will increase the cost of all food, and I do not think it is acceptable that in our country fresh fruit and vegetables start to become luxury items as the increases in the cost of living forces people to make choices that are not in the best interests of the health of themselves and their family.  

New Zealanders have to be able to afford to make choices around the type of food they fill their supermarket shopping trolley with.  And fresh fruit and vege needs to be at the top of the shopping list, and therefore affordable.  A University of Auckland medical school study shows that the price elasticity of healthy food is around 0.85 (i.e. for every 1% drop in price there is almost a 1% increase in purchase).  So price mechanisms do work in influencing behaviour – both ways (its the main reason why the govt increased excise tax on tobacco earlier this year).   

Let me give you a Napier example of how this policy will help many New Zealanders: the median income in Napier is $23,000.  According to the government’s tax calculator, this will deliver an after GST benefit of $3.17 per week in the hand.  If a family were to spend only $25 on fresh fruit and veges a week, the 15% GST on this mount is around $3.26.  So the cost of the fruit and veges is $21.74 - and the rest is tax.  We will put this tax back into the pockets of hard working Kiwis who will really struggle under the weight of increased GST.

If you are wealthy – really wealthy – and earn $1,000,000 per year, you will get about $1,000 in the hand per week extra under the Nat tax cuts on 1st October.  In Napier, if you are on the median wage you get $3.17 in the hand per week extra after GST.  That’s simply not fair.  Labour removing GST from fresh fruit and vegetables is fair.  And that is why we are doing it.

Filed under: GST, Tax
180 Comments

Stuart’s Sunday Serve – Maori party / Moral Hazard and SCF

Posted by Stuart Nash on September 12th, 2010

1. The Maori party’s private members bill to remove GST from healthy food… what a joke.!  Mr Flavell had the nerve to say in his speech that there was no politics in the Bill.  Ummm Okay…  This is the party that voted to INCREASE the goods and service tax on ALL food (including healthy food) not 6 months ago.  If the Maori party had the courage of their convictions, they would have voted against National’s budget: a budget that hurt a hell of a lot of kiwis - including many of that party’s constituents – by paving the way for a very inequitable ‘tax switch’ (more like a tax swindle).  There is a word that we are banned from using in the House to describe such actions, and it begins with H – I am sure you know what it is..!

2. We are going to hear a lot more about South Canterbury Finance in the days and weeks to come.  Moral hazard (occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk) is a principle that needs to be incredibly carefully managed – and the moral hazard consequences understood - in situations where ultimate responsibility does not rest with the organisation making the investment decision.  Theoretically, risk is rewarded. 

The govt effectively removed all risk from depositors, and all responsibility from SCF, by including the company in the retail guarantee scheme.  Okay so far (maybe) but my understanding is the govt had received advice that the company was in pretty serious trouble BEFORE it decided to include it in the RGS.  Now that doesn’t make sense to me.  Can someone please explain this, because I seem to have missed the logic boat on this one.

I spoke about this in the committee stage of the retail guarantee scheme extension provisions: when this scheme expires there will be a run on those institutions that are suddenly seen to be carrying  ‘unacceptably high risk’, whereas at the moment, there is no risk to depositors in companies included in this scheme, because the govt has guaranteed all deposits up to $250k.  Moral hazard occured as SCF channelled a significant chunk of its portfolio into high risk investments in the knowledge that final responsibility to pay if it turned to custard rested with the government.  Some investors invested with the same knowledge that their investments were guaranteed no matter what.

Before anyone pipes up and says that Stuart spoke in favour of - and Labour voted for – the Retail Guarantee scheme and its extension; what i will say is that I would never have expected a company that was known to be in rather serious trouble to be included in such a scheme in the first place.  I don’t think any reasonable NZer would.!

Filed under: GST, Tax
30 Comments

Earthquake commission

Posted by Stuart Nash on September 6th, 2010

It will be interesting to see where the Earthquake Commission has invested its vast resources – a huge chunk of which I assume will need to be liquidated in order to pay out claims resulting from the Chch earthquake.  My understanding is that they have around 1/3 invested overseas and 2/3 locally. 

Those who know more about this than I do will be able to comment on the impact on local capital markets as the EQC begins to draw down investments.

Filed under: Uncategorized
45 Comments

Stuart’s Sunday Serve – teachers and Mr Key

Posted by Stuart Nash on September 5th, 2010

Have been visiting a few schools over the past week.  Last Tuesday morning I walked into the staffroom of one school to an open Dominion with the page 3 headline ‘Teachers out of touch with reality – PM’.  Wow.  Gave me the perfect introduction, but I was surprised at the audacity of the PM in criticising such an amazing group of professionals. 

There are just 2 things I wish to say re Key’s comment:

1. as far as I am concerned, teachers are more in touch with reality than almost any other profession.  Especially in the lower decile schools where they do far more than simply ‘teach’. 

2. The govt’s strategy / plan / goal (whatever) is to catch up with Australia re wages and salaries.  Inflation is running at 3% this year, up to 5.9% next year, and the govt wants to give teachers 1%.  Hmmm.  That’s no way to catch the Aussies.  Teachers don’t earn million dollar salaries (but most deserve them).  They are, however, the guardians of the future: if they excel, so do our communities; if they fail, so do our children.  Quite a responsibility.

Mr Key’s comment was insulting.  A man worth $60m calls teachers out of touch with reality for wanting a pay rise that at least keeps pace with inflation.  A man who has just spent over a billion in tax payers money to bail out investors who pumped significant money into SCF knowing all investments were risk-free, and yet he can’t find more than 1% for our teachers. 

Perceptions of reality differ substantially between Mr Key and a whole lot of people. 

PS – definition of reality in the staffroom: a whole lot of pissed off primary school teachers at the way national standards has been rolled out.

Filed under: Teachers, economy, education
29 Comments

Income Splitting verdict from Brian Fallow

Posted by Stuart Nash on September 2nd, 2010

Brian Fallow’s verdict on Peter Dunne’s income splitting idea in today’s Herald… “Unfair, unaffordable and unlikely to happen”

He concludes with the following “And at a time when [National's] policy is to encourage welfare beneficiaries into the workforce it would find it hard to justify dispensing middle-class welfare to make it easier for the partners of the well-paid to stay home”

Says it all really.

Filed under: Tax
4 Comments

Income splitting back on agenda – groan.!

Posted by Stuart Nash on August 15th, 2010

I have taken the most unusual step of reposting a blog I wrote a couple of months ago on income splitting.  This is because as of 16th August (apparently) income splitting is back on the legislative agenda.  Unbelievable.  Would have thought that $500m/ann would be better off spent on creating jobs and economic growth rather than handing it back to those who are about to receive a big tax cut anyway.  Is this an admission that there simply is no plan except give money to those on high incomes?  Certainly appears that way.!

As the IRD noted in its report on income splitting “it might be perceived as unfair that the benefit from income splitting increases as primary earner income increases, providing more benefit to couples with higher incomes”

Part of the supply-and-confidence agreement between Peter Dunne and the National party is National supporting tax legislation around income splitting.  I questioned English about the possibility of income splitting legislation when he appeared before the Finance and Expenditure select committee recently, and he pretty much ruled it out.  Not surprising, considering the cost is estimated by the IRD to be around $500m per ann. 

When I questioned Dunne at FEC a couple of weeks later, however, he cited the supply and confidence agreement.  Earlier press statements seem to suggest that Dunne is serious about pursuing this course of action. 

So, does income splitting actually help those who really need it: those who are torn between going back to work fulltime, working part-time and/or staying at home to look after children? (Dunne’s proposal is only applicable to families with dependant children). 

The simple answer is no.  Working for Families is in place to help struggling families.  Dunne suggests keeping both.  The median household income is about $60k and the median wage is around $32k.  Therefore, many households have both parents working full-time now and would not benefit from an income splitting regime.  Those families who genuinely do have a ‘choice’ around whether one or both parents work, tend to be those who earn the most – makes sense.  ‘Choice’ implies a level of economic freedom: necessity does not. 

How would income splitting benefit kiwis on different salaries?  Outlined below are 3 scenarios (assuming a two parent household with at least one dependant child): ann salary $40k, $100k, and $140k.  JK’s tax cut figure is $$ in the hand per week before GST, ETS, inflation etc.  IS = income splitting.  This is also a net figure from the IRD’s calculations in a 2009 paper.  The actual figures will have changed slightly under the new tax thresholds, but you get the point…

$40k – JK’s tax cut – $23/wk + IS $23/wk = $46/wk 

$100k – JK’s tax cut – $69/wk + IS $163/wk = $232/wk

$140k – JK’s tax cut – $108/wk + IS $200/wk = >$300/wk

So you see.  If income splitting is to go through (and I very much doubt it will – but we will watch with interest as Dunne and Key/English fight this one out), once again, those on the highest salaries will be the real benefactors.  Also remember that around 70% of Kiwis earn less than $40k.  Even English admits income splitting is not well targeted.  Would have to agree with him just this once Mr Dunne.

Filed under: Uncategorized
39 Comments

Child support debt – the national shame

Posted by Stuart Nash on August 5th, 2010

A recent report tabled in the House by the Office of the Auditor General on the IRD’s management of the child support system highlights some serious issues in this rather sensitive area.

Over $1.5b is owed in child support payments.!  This is forecast to rise to $7b by 2018 unless something drastic is done soon to address the problem.  Of the current $1.5b outstanding, only around $195m is actually owed to parents – the rest is owed to the IRD in penalties and interest.!  The OAG concluded that the severity of the penalty regime can actually act as a disincentive to people meeting their parental responsibilities, as opposed to the incentive it is supposed to be. 

I think most of us agree that any parent who doesn’t take responsibility for their children by providing for the necessities of life needs to take a good hard look in the mirror.  ‘Front up and take responsibility’ is the message society needs to send to those who abandon their dependants.  About 68% of parents do make the correct payments on time, but that leaves 32% of parents who don’t.!

However, we need to have a system that is fair and an agency managing the system that understands its own responsibilities to the country’s citizens as well.  The data in the OAG’s report shows that the IRD only calls around 40% of those who enter into the child support scheme.  Remember, people enter this scheme often at a time of great turmoil and emotion.  IRD should be making an effort to contact EVERYONE and work with people to outline their financial responsibilities and how to best manage the situation.  A staggering 96% of all those within the child support system have had to pay a penalty at some point in time.  This is astounding.  The penalties are harsh – as mentioned, the OAG acknowledged this - if you are a minute late in paying, your debt jumps by 10%, then a further 2% per month.  A person’s debt doubles around every 3 years. 

The thing I find a little disturbing though, is that the penalty payments collected by the IRD don’t go to the parents looking after children, but straight into the IRD coffers.  How about this: if a person with a child support debt dies, the IRD tries to claim that debt from the estate – the estate doesn’t go to the children, who could well do with the funds – but to the IRD.!  How perverse.

At a speech in October last year, Minister Dunne said that he would have a paper to cabinet in ‘a couple of weeks’.  Almost a year later, and no sight of it yet.  So, like the management of most issues, Key’s cabinet collectively fiddles while Rome burns.  Its becoming a common theme.  Does this govt actually care?  Dunne has known about this problem for around 3 years (remember the man was Revenue Minister under Labour), and still hasn’t done a thing.!  Where is the plan to remedy this situation?  It simply doesn’t exist.  And who suffers?  Kiwis who can least afford it.  That’s hardly fair Mr Dunne and Mr Key.

Filed under: Child Support, IRD, children, debt, economic
66 Comments

All Black heroes

Posted by Stuart Nash on July 21st, 2010

Okay – we all love the AB’s.  Most blokes will admit to wanting to be one, and we tend to move heaven and earth to ensure we are near the TV (or, better still, at the ground) when a test is on (well I do anyway).  I would, however, like to share a story that shows what true heroes they are – to the younger generation…

Last Sunday at 10.00am my children and I attended a function in Wgtn, hosted by Westpac, for the children of the bank’s clients.  Charlie, my 5 yr old son, loves his rugby and the All Blacks, and in his eyes Ritchie McCaw is as close to a god as a mortal man can be.  Well, we turned up to a programme that included Ritchie McCaw, Mils Muliaina, Ma’a Nonu, Cory Jane and Victor Vito not only signing autographs on anything and everything, but running skills training sessions on tackling (Victor), kicking (Mils), stepping (Cory) and passing (Ma’a) with Ritchie going between all stations.

Remember, this was only 12 hours after they had played 80 minutes of hard out test match rugby against the Springboks.  They all looked a little sore, but they were brilliant with the kids. 

Fantastic ambassadors for the All Blacks, rugby and New Zealand in general.  And Charlie hasn’t stopped talking about it.  True heroes.

Filed under: sport
30 Comments

Has the Groser experiment been successful.?

Posted by Stuart Nash on July 18th, 2010

Every now and again, political parties bring acknowledged experts into their caucuses (almost always on the list) in an effort to bolster core competency and skills in a specialist area.  Sometimes these individuals do well; sometimes they don’t.  What history does show, however, is that no matter how smart or successful a person has been in a previous career, political experience and smarts cannot be fast-tracked.

There is no doubting Tim Groser’s experience as a trade diplomat.  The fact that a few in NZ’s international trade circles don’t speak as highly of him as he does of himself may be professional jealousy – or simply the size of his formidable ego, but that is another story.

The question I ask re the success of the Groser experiment has nothing to do with his trade negotiation competencies, but rather concerns his skills as a political operator around the cabinet table.

John Key and Bill English speak constantly about growing NZ’s export markets, and we recently heard Mr Key say that we should be aiming to double our trade with China.  Well, most parties (Greens exempted – they’ve voted against every FTA this term) agree with increasing the level, volume, consistently, sustainability and quality of our exports, but how is the country’s business community supposed to take advantage of the potential opportunities that FTAs present when the Nats have just cut millions from successful trade development schemes?  When I asked Groser about this in parliament he gave the typically smart-arse answer that he expected his staff to do more with less.  Okay…

The bottom line is that the national rhetoric simply does not match the trade funding.

The advantage to the country in having someone like Phil Goff as Trade Minister is that not only was he excellent around the international negotiation table, but also just as competent a negotiator around the cabinet table.  Someone as seasoned and smart as Phil knew exactly how to negotiate the minefield that is the budget process and who to talk to and deal with when securing funding for his portfolio.  It is these skills – as well as portfolio competencies – that make a very successful Minister.

This is why I ask the question if the Groser experiment has been successful.  There is no point negotiating FTA’s if NZ companies haven’t the competencies and / or backup and / or support to internationalise their products and services.  The cuts to trade development funding during Groser’s time as Trade Minister cannot be ignored.

Do more with less Mr Groser.?  Hmmm.  Somehow I don’t think this is the right answer.  Surely NZ companies with export potential deserve better.  What it does prove, is just how effective Phil Goff was as a champion for NZ trade.    And what a great PM he will make.!!

Filed under: trade
15 Comments

Exploding tax myths – Part 8 – Income splitting

Posted by Stuart Nash on July 4th, 2010

Myth – income tax splitting will allow New Zealand families to make choices around working versus bringing up children.

Reality.  Income splitting financially benefits the wealthy but very rarely the great majority who actually need assistance. 

Part of the supply-and-confidence agreement between Peter Dunne and the National party is National supporting tax legislation around income splitting.  I questioned English about the possibility of income splitting legislation when he appeared before the Finance and Expenditure select committee recently, and he pretty much ruled it out.  Not surprising, considering the cost is estimated by the IRD to be around $500m per ann. 

When I questioned Dunne at FEC a couple of weeks later, however, he cited the supply and confidence agreement.  Earlier press statements seem to suggest that Dunne is serious about pursuing this course of action. 

So, does income splitting actually help those who really need it: those who are torn between going back to work fulltime, working part-time and/or staying at home to look after children? (Dunne’s proposal is only applicable to families with dependant children). 

The simple answer is no.  Working for Families is in place to help struggling families.  Dunne suggests keeping both.  The median household income is about $60k and the median wage is around $32k.  Therefore, many households have both parents working full-time now and would not benefit from an income splitting regime.  Those families who genuinely do have a ‘choice’ around whether one or both parents work, tend to be those who earn the most – makes sense.  ‘Choice’ implies a level of economic freedom: necessity does not. 

How would income splitting benefit kiwis on different salaries?  Outlined below are three scenarios (assuming a two parent household with at least one dependant child): ann salary $40k, $100k, and $140k.  JK’s tax cut figure is $$ in the hand per week before GST, ETS, inflation etc.  IS = income splitting.  This is also a net figure from the IRD’s calculations in a 2009 paper.  The actual figures will have changed slightly under the new tax thresholds, but you get the point….

$40k – JK’s tax cut – $23/wk + IS $23/wk = $46/wk 

$100k – JK’s tax cut – $69/wk + IS $163/wk = $232/wk

$140k – JK’s tax cut – $108/wk + IS $200/wk = >$300/wk

So you see.  If income splitting is to go through (and I very much doubt it will – but we will watch with interest as Dunne and Key/English fight this one out), once again, those on the highest salaries will be the real benefactors.  Also remember that around 70% of Kiwis earn less than $40k.  Even English admits income splitting is not well targeted.  Would have to agree with him just this once Mr Dunne.

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Filed under: Tax
30 Comments

Is NZ ready to take advantage of new FTAs?

Posted by Stuart Nash on June 26th, 2010

During urgency last week, parliament ratified, through amending legislation, two new FTAs: one with Malaysia and the other with Hong Kong (technically, the HK treaty is called a Closer Economic Partnership (CEP) agreement).

Labour supported the passage of both Bills.  After all, former Labour Trade Ministers Jim Sutton and Phil Goff did the ground work.  However, I have major concerns about the government’s (and Grosser’s) ability to put the framework in place that will allow NZ companies to take advantage of these agreements. 

In last year’s budget the govt cut $110m over 4 years from New Zealand Trade and Enterprise’s (NZTE) budget, thereby slashing the funding that Labour had directed towards developing NZ international markets.

Why is a government overseas development agency important?  I could write a book on this, however, in a nutshell, 97% of NZ companies are SMEs (they employ 19 staff or less).  This means the vast majority that may have export potential simply do not have the resources to: a) employ a full time International Marketing or Market Development Manager, b) set up an office in an off-shore market, or c) fund the level of due diligence necessary to justify capital expansion in order to become ‘export-ready’. 

Only 12% of our exports now go to Europe – and these two FTAs were ratified with countries that have completely different cultures, customs, languages, legal systems etc.  Exporting into Asia is a whole new ball game and success requires a significant level of competency that is in short supply in NZ.  The Fonterra’s and Fletcher’s will be able to take advantage of these FTAs as they do have the resources, knowledge and networks, but as we know, these firms are few and far between. 

This is where NZTE should come to the fore.  This government organisation should, in my view, be NZ’s international eyes and ears (and a lot more besides…).  About 6 months ago, I asked the retiring CEO of NZTE if his organisation was NZ’s international market development manager, and he replied “if only…”. 

How can NZ achieve an international vision when $110m has been cut to the budget of the country’s off-shore operators?  Quite simply, we can’t. 

I think we all agree (except the Greens..) that if NZ is to achieve a high level of sustainable economic growth, it has to be though a much greater level of international engagement (ie grow our export volumes, value and competencies).  Negotiating free trade agreements is an important step, however, helping NZ companies see the possibilities and reach their potential is vital if we are going to make it a reality.  National is failing on this one I am afraid.

Tags: , , ,
Filed under: trade
45 Comments

Significant legal victory for IRD over use of Trusts for tax avoidance

Posted by Stuart Nash on June 6th, 2010

As those who read this blog will know, I have put up several posts about the role of Trusts and how many people use the Trust structure to avoid paying their correct rate of tax.

Well, in Saturday’s Dominion there was an interesting article briefly outlining the case, and the decision, behind one of the more significant tax precedents of recent times (amazingly, not reported in any of the Sunday papers, but written up in the NBR.  Somewhat surprisingly for a business newspaper, however, the NBR reporter missed the point and therefore got the details wrong.  To be fair, so did the Dom – as I understand the case…

The precedent came from a Court of Appeal decision in the case between the IRD and 2 orthopaedic surgeons (Penny and Hooper) who, according to the IRD, had set up family trust-owned companies to avoid paying their full tax entitlement.

As posted before, the disbursements from a Trust are taxed at a final rate of 33% (unlike, for example, company dividends, which are taxed at a person’s correct marginal tax rate).  These two men had set up companies that were then owned by Trusts (on advice from their lawyers and accountants…) and channelled their salaries through these entities, thus avoided paying the 39% rate, by only paying the Trust rate of 33% on the bulk of their earnings.  The tax avoided between 2002 – 2004 was around $168,000.

I am not going to post all the details of the case here, but needless to say, this decision will probably go to the Supreme court due to its significance, but if it doesn’t (or it does and is up-held) it will mean that the IRD now has the legal right to pursue possibly thousands of sole traders, who have, on advice, set up their affairs under the same structure.

The new tax regime that aligns the top personal rate with the trust rate at 33%, has rendered this particular tax structuring irrelevant, however, it still gives the IRD the power to chase thousands of sole traders who had also set up trust-owned companies in the past.  This, in turn, could well set in course a number of legal suits against the lawyers and accountants who provided the advice…  Watch this space, but there will be a large number of very nervous business men and women out there, and, no doubt, a few professionals checking their professional indemnity insurance polices come Tuesday…

Filed under: Tax
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Company tax – did it need to drop?

Posted by Stuart Nash on June 2nd, 2010

In an interesting, and provocative, article in yesterday’s Herald, Gareth Morgan was his belligerent best  http://tinyurl.com/2a6m4nl.  But he raises a very good point.  Was it really necessary to drop the company tax rate from 30% to 28%? 

The Tax Working Group was adamant that the tax rates for top marginal, Trust and company rates needed to be aligned in order to make irrelevant the ‘tax avoidance’ industry that had arisen due to the rate differential.  I agreed that the Trust rate and the top marginal rate needed to be aligned (and have blogged on this before), however, understand that company rate alignment wasn’t as important due to the way dividends are taxed.

Company rate alignment with Australia is often talked about as an economic and competitive necessity. However, we all know that taxes across countries are not equal.  For example, Australia has a payroll tax, and Australian companies pay 9% compulsory superannuation payments (increasing to 12%).  I once heard Dr Cullen ‘threaten’ a business audience, who were questioning him on the rate differential between NZ and Aust, to drop NZ’s company tax rate to match Australia’s but introduce all the other taxes paid by Australian companies.  This was met with huge resistance, and the discussion around the necessity of transtasman company rate alignment suddenly went quiet.  The fact that Dr Cullen did, in fact, drop the company tax rate meant that NZ companies enjoyed a tax advantage over their Australian counterparts.

The IRD understands that rate misalignment can foster the tax avoidance industry, however, only when it gets to the level where it becomes worthwhile to pay significant amounts of lawyer and accountant fees to organise and maintain these legal structures.  The IRD are unsure exactly what this level is, but know that a 3% level probably isn’t that threshold:  5% probably is.  Credit where credit is due though – Peter Dunne did get $119m in budget 2010 to chase the tax cheats.  This is needed and the investment will be well worth the cost if past history is anything to go by (about a $60 pay-off for every $1 invested in chasing tax debt, let alone tax avoiders)

Who will benefit from a drop in the company tax rate? As Gareth Morgan pointed out, tax accountants and lawyers will be laughing all the way to the bank - and the very wealthy who can afford to pay for such advice.    Other winners are the foreign-owned companies and investors, as many of the commentators have highlighted.  Foreign owned companies and overseas investors tend to take profits off-shore (NZ shareholders already benefit from imputation which means most of the company tax on their shares gets rebated to them), therefore charging these characters less tax does nothing to increase productivity and stimulate economic growth.

The hit to government revenue from this rate drop is $340m in 2011/12 and $450m in 2012/13.  Affordable in these economic times?  No.  Necessary?  Probably not.  Foster economic growth? The economic and Fiscal Update estimates that the total tax package in budget 2010 will increase GDP by 0.4% in 4 years time, and 0.9% by June 2017.  So no, this will not stimulate economic growth at all.  Will it attract Australian companies to NZ, or stop flight to Australia? No.  Company tax burden is a lot higher in Australia.  Will investors flood to the NZ stock exchange or suddenly invest in our ‘productive economy’? Not according to Treasury. So why was it done?  Who knows.  Ideas…

Filed under: Tax, economic
38 Comments

English – Assets for sale next term – Kiwibank first on block

Posted by Stuart Nash on May 22nd, 2010

Well, at least its out there now – http://tinyurl.com/2c3b273 - Bill English has signalled that assets will be sold if the Nats win another term. First on the block – Kiwibank. 

At Labour’s banking inquiry earlier this year, an analyst said that the introduction of Kiwibank had saved New Zealanders about a $1,000,000,000 in interest payments due to competitive pressure it had bought to the market.

Selling Kiwibank (and other assets) would be a disaster for the country – and is certainly something Labour would never ever contemplate. 

The true Nat agenda (as if we didn’t know) is at least not so secret anymore…

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Filed under: bank, economy
56 Comments

Bollard in 1992 on the impact of GST increases on the economy

Posted by Stuart Nash on May 19th, 2010

Reserve Bank Governor, Alan Bollard, wrote a paper in 1992 titled “New Zealand’s Experience with Consumption Tax”.  It dealt with the implementation of GST in NZ.   He wrote “in 1989 when GST was increased to 12.5% the effect on retail sales and subsequently on growth was marked; after experiencing signs of a pick-up the economy dropped back to recession the following year”. 

When asked about history repeating itself in the FEC select committee today, Dr Bollard said that the impact of the proposed GST increase on the economy would depend on the total tax package balance.  Interesting.  Remember when GST was increased by 2.5% in 1989, kiwis at the top end had just received massive personal tax cuts in 1988: the top rate dropped from 48% to 33%. 

I hope for NZs sake, history does not repeat itself with this current budget, because it all looks awfully familiar.

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Filed under: GST, Tax, economic
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PM – “Don’t be jealous – rich are crucial to economy”

Posted by Stuart Nash on May 18th, 2010

Who is as insulted as I am over PM Key’s statement, reported in today’s Dom Post, around why the highest earners will get the tax cuts in this week’s budget, at the expense of the 92% who earn under $70k/ann (http://tinyurl.com/23natqb)? ”We can be envious about these things, but without those people in our economy all the rest of us will either have less people paying tax or fundamentally less services they provide”

Well, my daughter is taught by a teacher earning under $70k, most of the police who put their lives on the line for us earn under $70k, nurses who fix us up when we fall over earn under $70k, and the vast majority of people who actually make this country tick – the backbone of the nation – earn under $70k.  Are these people any less deserving?  Do they not ensure that the wheels of industry are well oiled, the streets are safe and our citizens are provided with the services required of a first world country?  Of course they do.!

How bloody insulting.!  As I blogged earlier this year, there are a myriad of reasons people live and work in New Zealand – and tax is way down this list.  These changes will, if anything, drive middle NZ across to Australia and further afield.  Mr Key – just be honest with Kiwis and stop feeding us your propaganda: these tax cuts are not about creating equality of opportunity, driving higher productivity, developing a fairer tax system or building more equitable society – because they will not achieve any of these goals.  If you believe they will, then I suggest you start studying your economic and financial text books and reading your case studies –  those published this century – not last.!

Don’t get me wrong, I am not saying that our high achievers are not deserving – they are – but so is everyone else.  The increase in tax through the GST hike to 15% is broad and all-encompassing – so should the tax cuts be.!

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Filed under: GST, Tax
63 Comments

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