Smith Lockwood: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
Smith Lockwood: Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill — Second Reading In Committee 
[Volume:636;Page:7119] 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 Having raised a few issues just a moment ago over the establishment of the portfolio investment entities I will now raise some issues around the shrinking of the “grey list” and the establishment of the 5 percent fair-dividend rate. I cannot help but note that Gordon Copeland from United Future in speaking a moment ago said it is foolish to argue that this 5 percent fair-dividend rate new tax is in any way a tax on capital gains. Of course the Ministers in writing to the Finance and Expenditure Committee when the Government did the big U-turn on the original 85 percent capital gains tax said to the select committee that this fair-dividend rate was a method “which would also not target capital gains but rather something approximating a reasonable dividend yield.” The Ministers even said they did not want it to be a capital gains tax. 
I put this example to Gordon Copeland. One has $100000 in a portfolio investment offshore—less than 10 percent shareholding in any company. If in New Zealand one has a zero dividend payout for the year and let us say the investments are mainly in America the UK Canada or whatever—they have to be in “grey list” countries—and the exchange rate between New Zealand and those countries was to decline by 10 percent then those investments in New Zealand dollar terms have gone up for the year. One has had no income from them yet under this 5 percent fair-dividend new taxation that the Taxation (Annual Rates Savings Investment and Miscellaneous Provisions) Bill would bring in one would be taxed on those—even though one has had no income. All that has happened is that the capital value in New Zealand dollars of those investments has gone up because the New Zealand currency has declined against those foreign currencies. 
So the capital value of that investment in New Zealand dollar terms has gone up. One has had no dividend and the value of one’s investments in the currencies of investment has not gone up. But the New Zealand dollar value has gone up. That can be nothing other than an apparent capital gains tax because in New Zealand dollars one has had an apparent increase in the New Zealand dollar value of the capital of one’s investment and one is going to be taxed on it. 
I say to Gordon Copeland that this tax does tax capital gains. I would appreciate hearing the Minister’s comment on that—whether the Government has really thought through that issue and it is happy that New Zealanders will face taxation when the currency goes down. When the currency goes up of course they are not necessarily in a better position because although they may not owe tax or may owe less tax when the currency goes up they do not recover the tax they have paid when the currency goes down. 
Also I point out to Gordon Copeland the weighted international average dividend yield at the moment is 2.2 percent—the committee heard that repeatedly from experienced international fund managers. Those fund managers said the weighted average dividend yield internationally is currently 2.2 percent. That means if one is assuming a 5 percent return for managed funds here in New Zealand one is taxing way beyond the dividend yield. I do not care what fancy way Mr Copeland wants to define “income”. Income is only what one receives. Income is always defined by what one receives. That is why we refer to things as capital gains; they are gains because they are not income. They are only income when the capital is realised. If one is in a trading position then one is taxed on that realised capital here in New Zealand—as Mr Copeland pointed out. 
I come back to the point that with this 5 percent fair-dividend rate—which is supposedly fair and which National is seriously opposed to—because of a number of these issues such as currency shifts one faces a tax bill. If one’s investment goes down in value this year returns to the same value next year and no dividend is paid then one is taxed on the return to the same value as one started at. I would appreciate the Minister telling me whether I am wrong there but I believe I am right. Over a 2-year period if the value of one’s investment offshore goes down this year one is not taxed—I accept that. But if it returns to the start value next year one is in terms of wealth no better off because one is only back to where one started yet one faces a tax bill and has had no income. The investor is only back to what the investment was valued at last year—and Mr Copeland is saying that that is income. He is saying that this new tax is taxing only income. I put it to you Mr Chairman that it is not credible to make that argument. I would appreciate the Minister’s comment on that. 
So National is very opposed to this new 5 percent fair-dividend rate tax. It is a new tax that does have an element of capital gains in it and it is unfair.