Word of the day

February 22, 2019

Arcana – secrets or mysteries; a supposed great secret of nature that the alchemists sought to discover; specialized knowledge that is mysterious to the uninitiated; either of the two groups of cards in a tarot pack: the twenty-two trumps (the major arcana ) and the fifty-six suit cards (the minor arcana ).


Sowell says

February 22, 2019


Peter Tork – 13.2.42 – 21 2. 19

February 22, 2019

The Monkees’ bass and keyboard player Peter Tork has died:

. . . The Monkees – Davy Jones, Micky Dolenz, Michael Nesmith and Peter Tork – were brought together for an American TV series in 1966.

They were famous for their clean-cut image and were marketed as the American answer to The Beatles, notching up nine Top 40 hits.

As well as playing instruments for the band, Tork also sang on many of the tracks. . .


Rural round-up

February 22, 2019

Guy Trafford assesses how the Tax Working Group report would change signals to farmers, and how they are likely to respond – Guy Trafford:

Given the signals that have been coming out from the Tax Working Group over the last few months there haven’t been too many surprises as to what was revealed today. That may, probably will, come after the politicians have had their play with it.

From a farming perspective there are some pluses and minuses.

Succession planning
The roll over clause is attractive, but liable to alter land/business selling behaviour. It is only available as a succession tool in the event of the assets being passed on after the death. It is then made a liability in the event of the next generation deciding to sell at which point the value goes back to 2021 or whenever the older generation first took over the land. . . 

Grass on the A2 side of the dairy fence is looking greener – and the profits plusher – Point of Order:

The  contrasting   fortunes of  Fonterra  and  A2 Milk came into the  spotlight   this  week,  after the  latter  reported a  startling 55%  rise in  half-year net profit  to  $152m.  Fonterra  shareholders will be ruefelly recalling  their  company’s  performance last year  when  it  reported its  first-ever  net  loss  of  $196m.

A2 Milk  shareholders  are  marching to a  very  different  tune.  Despite  one market  analyst  reckoning its share price had  become over-priced, buyers  pushed  it up  by  more than  a dollar to  $13.95  as they absorbed  news  of   strong sales growth in all key product segments – infant formula, liquid milk and milk powders. . . 

Fatty milk Jersey cows in demand – Yvonne O’Hara:

”Fat is back” and no longer the ”ogre” it used to be, and that is good news for Jerseys as they have a higher fat content relative to protein than many other breeds.

DairyNZ’s New Zealand Animal Evaluation Unit (NZAEL) released its annual Economic Values (EV) index last week to reflect the increased global demand for high fat dairy products, compared to protein.

Economic Values is an estimate of a trait’s value to a dairy farmer’s production and profitability and contributes to cattle breeding worth (BW). . . 

LIC welcomes Fonterra’s a2 announcement:

The farmer-owned co-operative, which breeds up to 80% of the national dairy herd, says this increase in supply matches the demand it has experienced for its A2 genetics and testing services.

Last year, the co-operative introduced dedicated A2 bull teams and extended its test offering in anticipation of Fonterra’s next move with The a2 Milk Company.

LIC’s General Manager NZ Markets, Malcolm Ellis, who is also a Fonterra shareholder and farm owner, comments:

Fonterra scours world for $800m cash injection – Hugh Stringleman:

Where in the world will Fonterra get $800 million to reduce its debt while returning to profitability and making enough money to pay a good dividend on the $6 billion dairy farmers have invested in the co-operative? Hugh Stringleman looks for answers.

March 20 looms as the next milestone in Fonterra’s return to financial health and wellbeing when it declares first-half results for the 2019 year.

It will also say where asset sales, joint ventures and partnerships will be made or amended to improve the balance sheet. . .

Kiwifruit sector front-foots campaign to find pickers:

The kiwifruit industry is pulling out all the stops to make sure the 2019 harvest, which starts mid-March, isn’t short of workers – ensuring that quality Zespri kiwifruit is sent to overseas customers in premium condition.

New Zealand Kiwifruit Growers Incorporated (NZKGI) Chief Executive Officer Nikki Johnson says the amount of green and gold kiwifruit on the vines is forecast to be even higher than last year’s harvest, meaning around 18,000 workers will be needed. “Last year, the harvest was at least 1,200 workers short at the peak – we don’t want a repeat of that.” . . 

Central Districts Field Days has something for everyone:

More than 26,000 people are expected to flock to Manfeild in Feilding this month for New Zealand’s largest regional agricultural event, Central Districts Field Days.

Now in its 26th year, the 2019 event has plenty to offer all – from farmers and foodies to tech heads and townies.

“We’re really excited about this year’s event,” says Stuff Events & Sponsorship Director David Blackwell. “There are a record number of exhibitors and we have some great new areas and activities that are sure to make this year’s Central Districts Field Days a community event to remember.” . . 

Give it a go” – Bay or Plenty Young Grower of the Year  :

Alex Ashe, a technical advisor at Farmlands Te Puna, was named Bay of Plenty’s Young Fruit Grower for 2019 at an awards dinner in Tauranga last night.

The practical competition took place last Saturday, 9 February, at Te Puke Showgrounds, where the eight competitors tested their skills and ability to run a successful orchard in a series of challenges. These were followed by a speech competition discussing future disruptors to horticulture at the gala dinner last night. . .

Wine survey reveals profit, innovation and price on the up :

For only the third time in the history of the annual survey, all five winery tiers featured profitable results in 2018

Survey results indicate a positive correlation between innovation and financial performance.

2018 saw a 1.8 percent lift in average prices received by Kiwi wineries. . .

Veganism is on the rise, but experts say the cons of the diet outweigh the pros – Martin Cohen and Frederic Leroy:

After decades in which the number of people choosing to cut out meat from their diet has steadily increased, 2019 is set to be the year the world changes the way that it eats. Or at least, that’s the ambitious aim of a major campaign under the umbrella of an organisation simply called EAT. The core message is to discourage meat and dairy, seen as part of an “over-consumption of protein” – and specifically to target consumption of beef.

The push comes at a time when consumer behaviour already seems to be shifting. In the three years following 2014, according to research firm GlobalData, there was a six-fold increase in people identifying as vegans in the US, a huge rise – albeit from a very low base. It’s a similar story in the UK, where the number of vegans has increased by 350 per cent, compared to a decade ago, at least according to research commissioned by the Vegan Society. . . 

 


More than a CGT

February 22, 2019

The proposed capital gains tax (CGT) has got most of the attention, but worryingly there’s more, including the proposal of a water tax that would affect everyone:

IrrigationNZ says a proposed nationwide water tax would affect all Kiwis, and there needs to be more discussion about how this would impact households, farmers and businesses.

“The Tax Working Party has recommended the government consider introducing a water tax on all types of water use including hydro-generation, household use and commercial water use,” says Nicky Hyslop, IrrigationNZ Chair.

“This would result in higher power and food prices for households and businesses and higher rates bills to pay for the irrigation of parks and reserves as well as direct water tax on household and business water use.”

An increase in the cost of production inevitably leads to an increase in the cost of what’s produced.

The working party is proposing that the water tax could be used to fund the restoration of waterways.

“While we all want to see cleaner rivers, often the solutions to improving rivers require people to change their existing practices both on farm and to prevent urban wastewater discharges into rivers. Just allocating money will not be the most effective solution,” says Mrs Hyslop.

This was proposed before the last election and was rightly criticised for taxing the good to clean up after the bad.

“We need to think about whether a water tax is equitable as water use varies hugely across regions based on rainfall. For example a Christchurch resident uses an average of 146,700 litres of water per year, while the average for a New Zealander is 82,800. Someone living in Christchurch would pay nearly twice as much in a water tax as someone living elsewhere and would also pay more in rates because in a dryer climate the Council will use more water to irrigate their local parks. Is taxing dryer regions such as Canterbury, Otago, Hawke’s Bay and Marlborough more heavily with a water tax a fair way to fund river restoration nationwide?”

Mrs Hyslop says there are similar equity issues for farmers and growers.

“Some regions receive a significant amount of rainfall and farmers don’t need to use irrigation. Central Otago receives less than half the rainfall of Auckland, so farmers and growers rely on irrigation to grow stonefruit, wine and for pastoral farming to provide feed for animals. Only 7% of farmers use irrigation nationwide – why are those farmers being targeted to pay a tax which 93% of farmers won’t pay when there are many regions which have very poor waterways but little use of irrigation?”

Generally waterways with more irrigation are cleaner than those with less or none.

Mrs Hyslop says that a water tax on hydro-electric power generation would also add to power bills for households and businesses and this tax doesn’t make sense at a time when the government wants to encourage the use of renewable energy to meet climate change targets.

The poor already struggle to pay their power bills, why make it worse for no environmental gain?

“Currently a number of regions are suffering from very dry conditions and we need to be developing more water storage as climate change is predicted to bring more frequent droughts in the future,” she adds.

“We disagree with the suggestion in the report that introducing a water tax will encourage greater investment in water storage. If you look at the most recently approved water storage project – the Waimea Dam – a price increase for the dam construction nearly resulted in it not being built. Introducing a new tax on water use will add to be long-term costs of this and similar projects and make them less viable and less likely to be built. We really need more investment in these projects to ensure we have enough water to supply our growing population and get through more frequent future droughts.”

“We also have concerns that farmers and growers in many regions may face significant water tax costs in excess of $10,000 a year which will make it more difficult to fund the environmental improvements we all want to see to improve waterways,” she says.

“The report discusses how a water tax will encourage more efficient water use. There are already a number of existing incentives that encourage efficient water use including electricity costs and regulatory nutrient limit rules which require farmers to only use water when needed. The biggest improvements in water use efficiency come from modernising irrigation systems.Farmers and irrigation schemes have already invested $1.7 billion to modernise their systems since 2011, resulting in significant improvements in water efficiency. Introducing a major new tax will reduce farmers ability to replace an older irrigation system with a more water efficient model.” 

The capital gains and water taxes aren’t the only monsters unleashed by the TWG .

The Tax Working Group has gone much further than a Capital Gains Tax with a raft of new taxes targeting hard-working New Zealanders, National Leader Simon Bridges says.

There are eight new taxes including; an agriculture tax, a tax on empty residential land, a water tax, a fertiliser tax, an environmental footprint tax, a natural capital enhancement tax, a waste levy and a Capital Gains Tax.

“This is an attack on the Kiwi way of life. This would hit every New Zealander with a Kiwi Saver, shares, investment property, a small business, a lifestyle block, a bach or even an empty section,” Mr Bridges says.

“For farmers, who are the backbone of our economy, this is a declaration of war on their businesses and way of life. They would pay to water their stock, feed their crops and even when they sell up for retirement.

“Labour claims this is about fairness, but that’s rubbish. The CGT would apply to small business owners like the local plumber, but not to investors with a multi-million dollar art collection or a super yacht who won’t pay a cent more.

“The TWG has recommended one of the highest rates of Capital Gains Tax in the world. The Government would reap $8.3 billion extra in its first five years from ordinary Kiwis – small business owners, farmers, investors, bach and lifestyle block owners. After 10 years it would be taking $6 billion a year from Kiwis.

“It will lead to boom times for tax lawyers and accountants and even Iwi advisers, given recommendations for exclusions that include Māori land in multiple ownership.

“We believe New Zealanders already pay enough tax and the Government should be looking at tax relief, not taking even more out of the pockets of New Zealand families.

“National says no to new taxes. We would repeal a Capital Gains Tax, index tax thresholds to the cost of living and let Kiwis keep more of what they earn.”

The government keeps trying to counter the accusation it’s not a good economic manager.

Introducing new and higher taxes is not the way to do it.

It should be aiming for higher quality spending not more spending and reducing the burden of tax to allow us all to keep more of our own money.

 


CGT would hit middle hardest

February 22, 2019

It there’s such a thing as a fair tax, it’s not one based on misplaced envy as the Tax Working Group’s capital gains tax appears to be.

No photo description available.
Fairness is desirable but not at any cost and  it’s best achieved by helping the poor up not pulling the better-off down, especially when those who will be hit hardest are those with modest investments, not the really wealthy, and worse still, they’d be hit by one of the most penal CGTs in the world:

The Tax Working Group’s report released today proposes a broad-based top rate of 33% capital gains tax (CGT).

The New Zealand Initiative argues in a new policy note, The Pitfalls of CGT, that headline rate would immediately push New Zealand to the top of the international CGT rankings among industrialised economies, just behind Denmark and Finland.

“The proposal is conspicuous by a lack of exemptions and concessions around business investment, so a full rate would arguably qualify New Zealand’s CGT regime as one of the harshest in the world,” said Dr Patrick Carvalho, Research Fellow and author of the note.

“Worse, given New Zealand’s recognisably low-income tax thresholds by international standards, a new CGT would disproportionately hit middle-income earners already struggling to invest for retirement.”

“New Zealand should be cautious about siren calls for a top-ranking CGT. Trying to punch above our weight can sometimes place us in the wrong fight category,” concludes Dr Carvalho.

A good tax would foster investment that would help businesses grow, produce more and employ more.

A good tax would encourage and reward thrift and delayed gratification.

A good tax would improve productivity and promote growth.

The CTG as proposed would do the opposite.

New Zealand needs foreign investment because we don’t have enough of our own capital. The CGT would aggravate that by making investing overseas more attractive than investing domestically:

The Tax Working Group (TWG) proposals released this morning would skew New Zealand investors away from local assets, distort the KiwiSaver market and mangle the portfolio investment entity (PIE) regime if introduced, according to the founder of the country’s largest direct-to-consumer managed fund platform.

Anthony Edmonds, InvestNow founder, said while the TWG final report includes some welcome reforms, overall the capital gains tax (CGT) recommendations would add cost, complexity and confusion to New Zealand’s relatively efficient managed funds market.

“For example, the TWG’s plan to increase tax on New Zealand shares by applying CGT while leaving the fair dividend rate (FDR) tax for offshore shares unchanged would naturally drag capital offshore at the expense of local assets – at a time when New Zealand needs to fund major infrastructure projects,” Edmonds said. “In trying to discourage people from investing in residential property, the TWG has created a tax disincentive for Kiwi shares, which can only distort investment allocation decisions.”

Essentially, the TWG recommendation to tax unrealised capital gains on PIE funds marks a return to the ‘bad old days’ when Kiwis paid more tax on managed funds than direct share investments. . .

Concern over the housing shortage is one of the motivating factors for a CGT but It won’t improve home affordability in the long term:

Bindi Norwell, Chief Executive at REINZ says: “In the short-term there may be some initial relief in house price affordability as investors look to sell their property to avoid paying CGT. This may create opportunities for first home buyers.

“However, in the long term it’s likely to push house prices up as people look to invest more money in the family home, as there will be less incentive to invest in rental properties or other forms of investment e.g. equities.

“This will also have a flow on effect for the rental market with fewer rental properties available for tenants, thereby further pushing up weekly rental prices when they are already at an all-time high.

“The report even recognises that any impact on housing affordability could be small, therefore, we question whether all of the administrative burden and cost to implement GCT is worth it? Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing. . .

A tax that results in fewer and more costly rentals and more expensive homes is not a good one.

Nor is a tax that is fatally flawed:

Today’s Tax Working Group report recommendation for a new capital gains tax will not address residential housing affordability but it will penalise business owners and create costly complexity in our tax system, meaning it is fatally flawed, according to Business Central.

“New Zealand’s tax system is envied worldwide. The proposed capital gains tax increases compliance costs without boosting productivity,” says Business Central Chief Executive John Milford.

“Business Central agrees with the conclusions of the minority view on the Tax Working Group.

“A capital gains tax is just another cost on business, nothing more. . .

It would hit small and medium businesses hardest:

Key areas of the Tax Working Group Final Report released today were disappointing, says Canterbury Employers’ Chamber of Commerce Chief Executive Leeann Watson. . . 

Ms Watson says the proposed capital gains rules should not be implemented because of the significant impact on small and medium-sized enterprises (SMEs).

“We support the Government’s review to ensure that our tax system is fit for purpose for a changing business environment. However, there is very real concern that taxing both shares and business assets under a comprehensive capital gains tax regime would create double taxation.

“This could disadvantage New Zealanders owning shares in New Zealand and create inconsistencies around overall taxation on investment.”

Ms Watson says a capital gains tax would be unlikely to achieve the desired outcome for business.

“There is concern around the effect for capital markets in a capital constrained economy with a long-term savings deficit. Adding further tax on the savings and investment of those New Zealanders in the middle-income bracket won’t drive the deepening and broadening of the capital base that we need for business investment, which is higher productivity and wages.

“While the impetus behind the changes are aspirational, there is little to indicate they would significantly reduce overinvestment in housing or increase ‘tax fairness’. In addition, there is concern that additional administration costs and investment distortions could outweigh any benefits and potentially discourage much-needed investment and innovation by locking businesses into current asset holdings.

“It is vitally important that we remain competitive as a country and are not continuing to add further compliance for business and in particular small business, who represent 97% of all businesses in our economy.”

Ms Watson says there needs to be a viable business case for any changes to the current tax system.

“There seems to be a real focus on ‘fairness’ in the system design, as opposed to revenue-building, so we need to be careful that any tax changes are for the right reasons and are backed by a clear, practical and sustainable business case. We currently have a fairly simple and efficient tax system that should be kept and better enforced, with changes to specific rules where needed.” . . 

The costs of a good tax would not outweigh the benefits:

The Employers and Manufacturers Association (EMA) says the key issue in the Tax Working Group’s proposal released today is that the cost of its capital gains tax rules will outweigh any benefits.

Chief executive Brett O’Riley says any gains from such a broad-based capital gains tax would be eaten up by administration and other costs, leaving little revenue.

“Fundamentally the proposed capital gains rules don’t address the Tax Working Group’s objectives of reducing over-investment in housing and increasing tax fairness,” he says.

Mr O’Riley is also concerned that capital gains tax on business assets could discourage investment and innovation, locking businesses into their current asset holdings. He says there are other policy settings that could be changed to increase investment in different asset classes, away from property.

“I also fail to see how taxing growth on the value of assets from the proposed commencement date of 1 April 2021 would work, because it would be open to conflicting valuations,” he says. “It could also act as a further disincentive to growth when New Zealand already has issues with business not growing from SME’s into larger scale operations and a CGT may also limit the availability of capital to reinvest in businesses as smaller businesses face an additional tax bill.

“It’s difficult to see any benefits for the business community from implementing the proposed capital gains tax rules, as taxing both shares and business assets appears to be double taxation,” says Mr O’Riley.

It is relevant to note that a number of the Tax Working Group do not favour its recommendations on capital gains tax. The minority view summary is available here

One reason for dissension was compliance costs:

Former IRD Deputy Commissioner Robin Oliver was one of the 11 in the Tax Working Group.

Along with two others from the group, he believes the costs and bureaucratic red tape involved in adopting all the capital gains options outweigh the benefits.  

“We didn’t agree that this was in the best interest of the country to go the full extent, particularly in the business area, taxing share gains which result in double taxation,” he said.

“To get a valuation for all business assets in all parts business and all business will easily cost over a billion dollars in compliance costs. The amount of revenue you’ll get is relatively minor.”

As for taxing shares, Mr Oliver said it would result in New Zealanders who invest in New Zealand companies paying more tax when foreigners investing in New Zealand companies will pay no more tax. Furthermore, New Zealanders investing in foreign companies will pay no more tax.

“The obvious conclusion is New Zealanders will own less New Zealand companies and more foreign companies, and foreigners will own our companies,” he said. . . 

The proposed tax is no panacea for fairness:

Deloitte tax partner Patrick McCalman warns that a CGT is not a panacea for tax fairness.

“At one level, there is an attractiveness in the argument that a ‘buck is a buck’ and everyone should bear the same tax burden on every dollar earned. However, when one delves into the detail of the design, other issues of fairness emerge,” says Mr McCalman.

“For example, is it fair that property could pass on death without an immediate CGT cost, while gifts made during one’s life would be taxed? For family businesses, wouldn’t it be more productive to be able to pass assets from generation to generation before death,” he says.

“Accordingly, we need to be cautious as to how much ‘fairness’ a CGT will introduce. It may simply change where the ‘unfairness’ is perceived to sit within the tax system, creating new tax exemptions that would distort where investments are made.”

Complicating matters further is the political dimension. And MMP only exacerbates the political difficulty and increases the likelihood of whatever ultimately sees the light of day being less coherent from a policy perspective. . . 

The Deloitte paper raises several questions about fairness:

At one level there is an attractiveness in the argument that a “buck is a buck” and everyone should therefore bear the same tax burden on every dollar earned. However, when one delves into the detail, other issues of fairness emerge including new tax exemptions which would distort where investments are made – in effect, in seeking to create fairness, the proposal creates a number of layers of unfairness. For example:

    • With a CGT applying at full rates with no inflation indexation, is it fair that someone who buys an asset is taxed on the full amount of any gain when part of that gain is simply inflation? How will they be able to re-invest in a new asset if the inflation element is taxed?
    • Is it fair that the family home and artwork are excluded but most other property is not? Consider a plumber who has a $500,000 house and a $500,000 commercial building who would be taxed on the disposal of the commercial building. Should they have instead bought a $1,000,000 house, rented a business premise and enjoyed a tax free capital gain?
    • Is it fair that that investors in New Zealand shares would pay tax on capital gains but investors in foreign shares would continue to be subject (as they are presently) to the 5% FDR rate (even if gains are less or more)?
    • Is it fair that small business (turnover less than $5 million) could sell assets and defer the CGT bill if they reinvest the proceeds, while medium and larger size business cannot?
    • Is it fair that property could pass on death without an immediate CGT cost but gifts made to children during one’s life would be taxed?
    • Is it fair that there are proposed tax reductions for KiwiSaver to compensate for CGT but not for other forms of investment?

At one level, true fairness can only exist if all asset classes and forms of remuneration are subject to the same tax rate. But even then, anomalies will always arise. . . 

The proposed tax would be especially bad for farming and farmers:

Federated Farmers has said from the outset that a capital gains tax is a mangy dog, that will add unacceptably high costs and complexity.

“There is nothing in the Tax Working Group’s final report, released today, that persuades us otherwise,” Feds Vice-President and Commerce spokesperson Andrew Hoggard says.

“A CGT would make our well-regarded tax system more complex, it will impose hefty costs, both in compliance for taxpayers and in administration for Inland Revenue, and it will do little or nothing to ease the housing crisis.”

It is notable that even the members of the working group could not agree on the best way forward, with three deciding a tax on capital gains should only apply to the sale of residential rental properties and the other eight recommending it should be broadened to also include land and buildings, assets, intangible property and shares.

“Federated Farmers believes that the majority on the tax working group have badly under-estimated the complexity and compliance costs of what they’re proposing, and over-estimated the returns.”

The recommended ‘valuation day’ approach to establishing the value of assets, even with a five-year window, will be a feeding frenzy for valuers and tax advisors, “and just the start of the compliance headaches for farmers and other operators of small businesses that are the driving force of the New Zealand society and economy. . .

Farm succession is difficult enough as it is.

A CTG would make it harder still and encourage older farmers to hold on to their farms. That would lead to more absentee ownership and leasing with less investment in improvements as happens in other countries.

New Zealand doesn’t have a lot of many wealthy people and while those relatively few would pay more with the CGT as proposed, if their accountants and lawyers didn’t help them find ways to minimise their liability, they’d still be wealthy.

The many small business owners and more modest investors would not. They’d have the reward for their hard work and thrift cut back and lose enough of the value of their investments to hurt – unless they’d invested in art, cars or yachts which would be exempt.

That sends the message that such luxuries are good while investing in businesses and productive assets is not.

Where’s the fairness in that?


Quote of the day

February 22, 2019

It seems that when you get to a certain age you almost give yourself permission to misbehave and say what you think. People allow it, with very old people. Julie Walters who turns 69 today.


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