Join the Boomerznz Network as a Red Member FREE and receive a complimentary copy of Craig Stobo's article

 

Craig Stobo of Saturn Portfolio Ltd was guest speaker at our Coffee Club in November 2008.

Click here to join the Boomerznz Network as a red member FREE and you'll receive a complimentary copy of Craig's complete article on "Creating Wealth for New Zealanders" - valuabe information for 'baby' boomers.

 

Executive Summary of Craig Stobo's article "Creating Wealth for New Zealanders":

New Zealand relies heavily on overseas savings and in particular debt to finance domestic investment. This has considerable risks. There are strong gains to be made from diversification of savings sources. The Taupo Group absolutely believes that developing New Zealand’s capital markets will assist in a reduction in this risk and has commissioned this Primer to highlight the possibilities. The following initiatives are for public discussion, endorsement and prioritization and action.

GOVERNMENT
Government savings have recently been positive and Government net wealth is growing rapidly. Given this improvement the machinery of Government needs to evolve.

  1. New Zealand Super Fund should consider how to mitigate its concentration risks and how to leverage its needs in the local capital market.
  2. The New Zealand Debt Management Office should become the New Zealand Asset Liability Management Office and manage government-owned assets as a changing set of portfolio of risks at arms length to Parliament.

The expected impact of these changes is improved risk management across government - and ultimately an improved performance from the government's assets and liabilities. This will increase the options the government has to manage the pressures that it faces going forward.

HOUSEHOLDS and WORKPLACES
Kiwisaver has been successful in terms of membership growth. Although it is early to judge and causality is unclear there appears to be substitution from existing savings. In addition scheme providers will have to either cut costs through technology innovation and/or increase scale, and/or raise fees to remain long term providers. Default schemes may not meet the needs of long term savers.

  1. Introduce compulsory asset allocation by age OR support the Retirement Commission’s call to action to introduce financial literacy in all schools in 2009.

Based upon available data household savings are negative, and inversely correlated to the growth in housing wealth. Housing may be the principal source of most Kiwi’s net wealth. New Zealander’s holdings of financial assets are relatively low.

  1. Support the Retirement Commission’s call to action to introduce financial literacy in schools
  2. Rebuild trust in the integrity of the New Zealand financial services industry

The expected impact of these changes is: the improved financial literacy will result in better decisions by households and expand their real options for the future. This impact will be reinforced by growing financial assets and diversified risk profile, which over time, and across economic cycles, increase household wealth. Historically, the international equity component of financial assets has returned 7% real (Siegel, 1994).

CAPITAL MARKETS
The principal means of financial intermediation in New Zealand is via subsidiaries of Australian-owned banks which rely heavily on offshore funding. Their principal asset is residential housing. This concentration and asset/liability mix is unusual in an international context. Capital market depth is consequently present in New Zealand foreign exchange markets including swaps, but weak in equities, bonds, and their derivatives. A diversification of risk and an invigoration of capital markets can occur through improved taxation design and new products.

Corporate Bonds

  1. Alter the Approved Issuer Levy to encourage local debt issuance.


Equities / Imputation Regime

  1. Change the integration threshold for cornerstone shareholders
  2. Allow non taxable revenue to be distributed tax free in shareholder hands
  3. Conclude mutual recognition discussions with Australia
  4. Relax shareholder continuity rules as they apply to imputation credits
  5. Recognise foreign tax credits for New Zealand shareholders


Capital Gains Tax Regime

  1. Resolve the tension between the treatment of tax for investors in PIEs and the capital gains tax framework for investors in direct securities on revenue account.


Industry expansion

  1. Set the Prescribed Investor Rate in PIEs and Non Resident Withholding Tax at 0% for foreigners who own foreign assets via New Zealand entities.

The expected impacts of these changes include:
  • the development of a vibrant funds management industry located in New Zealand with an international focus - with the relocation of fund managers incentivised by the tax changes. And this comes at no cost to the New Zealand tax base, as those attracted by the changes are not currently in New Zealand. This will develop finance skills in New Zealand and provide employment opportunities for Kiwis currently overseas wanting to come home. The New Zealand equity market makes up less than 0.1% of total international market capitalization. This initiative will allow New Zealand to interact with savers globally.
  • expanded investment options for New Zealand savers - through an increase in local debt issuance providing broader investment opportunities than those currently available.
  • increased efficiency for New Zealand companies and their shareholders through being able to pass on capital gains.
  • reduced incentive for majority foreign owners to buy 100% of New Zealand companies for tax efficiency reasons (and thereby further expanding the investment opportunities for New Zealand savers).
  • an increase in liquidity and depth in the New Zealand equity markets.