Copeland Gordon: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
Copeland Gordon: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
[Volume:636;Page:7116] 
GORDON COPELAND (United Future) 
: 
 I would like to take a call on the 5 percent fair dividend rate which is contained in Part 2 of this bill. I think I have earned the right to speak on this because I listened to many many hours’ worth of submissions on the fair dividend rate and I must say that some of them were a mixture of ignorance wisdom and everything in between. I think that it is very important to at last put a few facts on the table with regard to the process that has led to the 5 percent rate and if you like its “embeddedness” into the reality of what it means to invest in the stock exchange. When we buy shares in a company we become a part-proprietor of that company. We may be only one-millionth proprietor because there might be almost a million other shareholders but we nevertheless are proprietors of that company. After that company has earned an income and has paid its due tax on that income—in whatever jurisdiction in whatever country in the world it belongs to—the after-tax income belongs to the shareholders of that company. Therefore as investors we have a share of that income. 
What this bill attempts to do is to say that the Government will tax us a fair amount and a fair rate based on the fact that we have just gained an income. After all this is an income tax bill. The evidence placed before the Finance and Expenditure Committee which is very well known was that over time if we invest on the international stock exchange around the world—and we could look at various periods but if we take the period from about the 1980s through to today which is about 26 years—on average the income yield or the return yield to an investor is 9 percent. This bill says that the Government will tax investors on 5 percent out of that 9 percent. Why not the whole 9 percent? The reason is that some part of that 9 percent in addition to the income that investors receive from the company is the market’s evaluation of the future income stream of the company which we call capital gains. It is an estimate of what the ongoing earnings might be capitalised today. The whole theoretical basis underlying that is called the internal rate of return or the net present value of future income streams which comes into today’s valuation on the stock exchange of those particular shares. 
This bill does not in any shape or form tax genuine capital gains from the stock exchange. It is a tax on if you like a fair dividend yield—and I will put this fairly and squarely on the record: if a company earns an income after tax regardless of whether it distributes that income by way of dividends or retains it the investors as shareholders have still gained an income from that company. That is the essential point of the fair dividend rate method. We are saying that if people are shareholders they have earned some income and because we have an income tax system on every other form of income in New Zealand—whether the income is gained here or from overseas—those people need to pay their fair whack of tax on that income. 
I have mentioned that the average return is 9 percent and that we are taxing at a rate of 5 percent. Is there anything magic about that? The answer is no but the rate is about right. It is as right as any other rate that anybody who came before the select committee could otherwise argue for. Some people who came before the select committee—many people actually—said that investors should pay tax only on the actual dividend they receive. That is pure nonsense and anybody who has ever had any dealings at all or who has ever invested in the stock exchange knows that that is nonsense. I for one was very disappointed to sit there and hear members of my own profession come along and make that ridiculous argument. As I said before it does not matter whether one receives a dividend; one receives an income. And if a shareholder does not receive an income everybody knows that the value of that person’s shares on the stock exchange goes up. Immediately when a company declares its profit the value normally goes up. It comes down of course if the company declares a loss. 
Dr the Hon Lockwood Smith 
: That’s a capital gain. 
GORDON COPELAND 
: That is not a capital gains tax; that is a share of income earned. I have just explained the difference between the two things. I will take another call if the member does not understand the difference and I will explain it again. One gains a share of an income when one buys a share in a company. One becomes a proprietor of that company. We are attempting to put an income tax on a fair share of that income. I would say that the 5 percent is actually rather conservative when we take that reality into account.