Gav's Blog

I’ve just received my first annual KiwiSaver statement from Mercer KiwiBank and I must say I am very disappointed with the reporting. There is a key gap in making the connection between money contributed and the conversion to units held. Whilst the statement clearly outlines the dollar contributions, it does not include the number of units purchased by each contribution, nor the unit price on date of conversion to units. This is fundamental reporting for managed funds.

Instead, all I received was effectively a ‘black box’ statement that I held x units at 31 March, and here was the value of the units on this date. This gives absolutely no accountability of the conversion process from contributions to units. For a Government imposed savings scheme we deserve far more transparency in investment transactions. This is less of an issue with conservative investments where unit prices won’t vary significantly, but with high-growth long term investments unit pricing will need proper and transparent reporting.

I called Mercer KiwiSaver this morning, and confirmed that this information is not accessible either on the statement, or via the website. As a result, I have emailed KiwiSaver to let them know about this oversight and my concerns. Only the current unit pricings are available.

I recently received my annual KiwiSaver statement from the Mercer KiwiBank scheme I am a member of, and I am concerned that the statement does not provide enough detail about investment transactions.

My concern is that there appears to be no record accessible by the member that details for each contribution how many units in the investment were purchased. The only reference that is given is the number of units held at the end of the period and their current value.

I feel that this is a critical gap in the reporting requirements of KiwiSaver – members should be able to see on their statement that if they contributed $100, how many units were purchased with that contribution, and the price that they were purchased at. This is more important for the high-growth investments that will see more variability in unit prices than it is with more conservative investments.

As someone that has invested in managed funds for the past 15 years or more, I am used to seeing this information reported on, and I am very concerned that this information is not being openly provided by the fund managers – either in the annual statement, or on their website. This was confirmed by a phone call to their call centre this morning.

What follows is my submission to the Finance and Expenditure Select Committee on the proposed investment bill.

Members of the Finance and Expenditure Select Committee
C/- Clerk of the Committee
Select Committee Office
Parliament Buildings
Wellington

Thursday, August 3, 2006

Re: The Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill

I wish to raise my general objection to the above bill, reasons for which will be outlined in brief points to follow.

In general I believe that the proposed bill is a backwards step in terms of encouraging New Zealanders to become more capable investors. The strong focus given to fund management – at the expense of international equities is extremely ill-considered.

The key point of disagreement is that the proposed bill will not achieve the equity and balance that the promoters are suggesting – it will in fact result in the opposite, a more uneven investment environment that will seriously impact the future wealth of New Zealand.

Further points of disagreement are outlined below. These are listed in no particular order.

It will not create a neutral investment tax environment
The proposed bill will not create a neutral tax environment as is suggested. It is highly likely that investors, myself included, will look for alternative forms of investment – including residential property. Of course, residential property does not currently attract a Capital Gains Tax so it is potentially an attractive investment option relative to equities.

Tax on unrealised Capital Gains
It is extremely unfair to raise a tax on unrealised Capital Gains. Any gains shown in an investment are not concrete until the equity is sold and converted to cash. At this point in time it would be more equitable to tax Capital Gains – although this still is not a preferred option. There are many events that may cause short-term volatility in an equity that may be taxed – even though an investor does not make any real gain, these include exchange rate fluctuations.

Impact on New Zealand Dollar
This bill will have a significant impact on the strength of the New Zealand Dollar. Many investors will make the decision to repatriate their investments that are held in currencies such as the US Dollar, British Pound and Euro.

The decision to repatriate NZD will mean that New Zealand investors will hold less international currency and will reduce the income produced from other countries that increases New Zealand’s overall wealth and hence backing of the New Zealand Dollar.

Encourage inappropriate investing behaviour
The proposed bill will likely promote a change in investor behaviour to minimise the amount of Capital Gains Tax paid. This could include decisions to liquidate stocks shortly before the end of the financial year for tax reasons – as is commonplace in the US market with the stock selloffs that occur in December each year.

Increased compliance costs
This proposed bill will added additional compliance costs in terms of time and expense – and will require increased use of accounts in completing valuations and tax returns. This will reduce the overall return on investment – once again this will impact investment decisions and would likely promote the migration towards investments that are more easily understood and have reduced compliance costs.

Detrimental to New Zealand businesses
The promotion of a move away from equity investment as a result of this bill, will be detrimental for capital injection into New Zealand businesses. The reduced return, with no subsequent reduction in the associated risk will result in investors choosing lower risk and return investments. This will make it harder for New Zealand businesses to gain local capital, and they will be required to search for offshore investors – who will benefit from the returns, and potentially gain ownership control of these ventures.

Size of the Australasia equity market
The New Zealand equity market represents approximately 0.5% of the world equity markets – Australia around 2.5%. This bill will encourage gross over-investment by New Zealanders in a small (~3%) segment of the world equity market due to the lack of a Capital Gains Tax. This will increase our risks to shocks and financial crises due to the small size and value of our markets. A balanced investment portfolio requires a reasonable international distribution. Ironically, the New Zealand Superannuation Fund holds approximately 85% of its investments outside Australasia.

Promote a resurgence in property investment
If this bill is passed in its current form, it will create a bias towards further investment in property in New Zealand which may have serious negative consequences for much of the country. International returns would be repatriated and further invested in property. This increase in property investment would produce an increase in house values which would increase the level of debt that New Zealand families would be exposed to, and this would be exacerbated by the increased lending from foreign-owned banks, and the returns on debt being siphoned off to investors in other countries. For those that can’t afford to purchase property, rental rates will increase as property investors demand higher returns. This will hurt the current Governments voters the most by forcing families and first home buyers to commit to even larger loans. The cash grants offered by KiwiSaver will be inconsequential relative to the increase in property values caused by the proposed bill.

Managed Funds are not an ideal investment vehicle
Despite the promotion and marketing of managed funds, many studies have shown that a minority of funds are able to outperform passive funds tied to share-market indices. This implies that most managed funds are inefficient investments – and hence not utilised by educated investors. Additionally, managed funds often attempt to spread their risks by investing in a large number of equities – this results in not only the spreading of risk, but also suffers reduction of returns, whilst at the same time profiting the investment company.

Bringing Capital Gains Tax into the spotlight
The issue is going to raise general public’s attention towards Capital Gains Taxes. When people discover that they are paying CGT indirectly via their managed funds, and hence accepting reduced returns, they too may consider adjusting their investment portfolio in favour of those investments that don’t attract CGT – including property. This will also cause unintended growth in the property market.

Expat Kiwis will be less likely to return home
Expatriate Kiwi’s will be less inclined to return home with the investments that they may hold overseas, which may now attract considerable Capital Gains Tax on unrealised gains. The New Zealand Government has done nothing to justify taxing these yet-to-be-realised returns.

Suggestions
The proposed bill should be modified so that an unrealised Capital Gains Tax is not introduced on international investments – as it will have a significant impact on New Zealand’s approach to investment and our overall wealth. The status quo should be maintained. Other parts of the bill unrelated to this issue may be retained.

Capital Gains on managed funds should be removed to create a neutral tax environment so that international and New Zealand equities, managed funds, and property share a level playing field.

Yours sincerely,

Gavin Treadgold