NZ Herald 6 May 2023

AThere is so much wisdom in your letter.

On buying local, it’s a lovely idea, but not great if it means you buy stuff you don’t need.

I totally agree about brands. My watches were two for $32 at the Warehouse. I think they look fine and, most importantly, they work.

AYou’re quite right, although the Simplicity share fund is not the only good option.

The reader was interested in investing in shares, so that’s why I suggested a couple of exchange traded funds. You buy and sell shares in ETFs just like other shares, but they in turn invest in a wide range of companies, so you get good diversification.

Most ETFs invest in the shares in a market index, such as the NZX50. These types of funds are cheap to run, so they charge low fees, and research shows that over time they perform better, after fees, than most actively managed share funds, whose managers pick shares to buy and sell.

But there’s another type of fund that also invests in an index and operates like a KiwiSaver fund. You invest directly with the provider. Providers include Kernel, Simplicity and SuperLife, and some InvestNow funds. We’ll call these unlisted index funds.

Which is better — an ETF or an unlisted index fund? I asked Dean Anderson, CEO of Kernel, which offers index funds, and Simon Beattie, head of investor relations and communications at NZX, which offers ETFs:

• Anderson: “Unlisted index funds typically have lower total costs for investors. This is because ETFs require additional expenses such as broker fees and bid-ask spread every time you buy and sell. Brokerage rates in New Zealand vary between 0.20 per cent and 1.00 per cent per trade.

  “With unlisted index funds, you purchase units directly from the manager or through some investing platforms, with no brokerage fees.”

• Beattie: “It is true that an investor will incur brokerage costs when they buy and sell listed units in an ETF. However, transaction costs can also be involved for investors buying and redeeming units in unlisted index funds.

  “When an investor buys or redeems units in an unlisted index fund, the fund manager may need to incur costs in purchasing or selling assets in the fund to either invest the new money coming in from a new investor or to fund the cash payable to a redeeming investor.

  “The index fund manager might apply an adjustment to the fund’s unit price that reflects their estimate of the transaction costs incurred by the fund — this is known as a ‘buy/sell spread’. If a manager does apply a buy/sell spread to its unit prices, then this should be expressly permitted under the fund’s governing documents and clearly disclosed to investors.”

• Anderson: “NZ ETFs are also classified as listed PIEs, meaning the fund is automatically taxed at a fixed 28 per cent. Investors on a lower PIR rate may be able to claim a credit at the end of the financial year, if they have other taxable income.

  “With an unlisted index fund, your tax will automatically be calculated using your actual PIR rate. This can result in greater tax efficiency for the investor.”

• Beattie acknowledges this, adding, “For investors with a PIR rate lower than 28 per cent, this can make life a bit easier from an administration perspective, as the fund manager will handle all aspects of PIE tax on the investor’s behalf.

  But he adds, “For unlisted PIEs, it is the investor’s responsibility to tell the manager their PIR rate when they invest or if their PIR changes. If an investor does not tell the manager, then a default rate may be applied.

  “If the rate applied to an investor’s PIE income is less than their correct PIR then the investor will be required to pay any shortfall as part of the income tax year-end process. If the rate applied is higher than the investor’s PIR then any tax over-withheld by the manager will be used to reduce any income tax liability the investor has for that tax year, and any remaining amount will be refunded.

  “For listed PIEs, the amount of tax that each fund pays is calculated at the rate of 28 per cent. However, for NZ tax purposes, certain tax concessions apply to distributions made by listed PIEs.

  “For NZ tax residents, these concessions mean that if you are currently paying tax at a rate of less than 28 per cent the excess tax paid by a fund may be able to be used to reduce the tax payable on other income that the investor earns at the end of each income year. To do this, the investor would need to include the fully imputed portion of any distributions (including bonus issues) from the fund in their own tax return.”

  Beattie adds that people should get expert tax advice on their situation.

So where are we? All of this is really chipping around the edges. If you like buying shares, an ETF might be your choice. If you’re happier with a KiwiSaver type of investment — but one you can withdraw from whenever you want to — go with an unlisted index fund.

Both are excellent long-term investments.

A Comment on Capital Gains Tax

I’ve received a few letters about a possible capital gains tax, or CGT. But I’ve decided not to run them for now. So many replies will be “it depends what the government proposes.”

The last time such a tax was on the table this column was full of letters about it. Readers came up with all sorts of situations where CGT might not be fair, or were just puzzled about how it would work.

If this government, or whatever government we get after the election, proposes a CGT, we’ll come back to the topic. And, I might add, whoever drafts the legislation might want to keep an eye on the issues that readers brought up a few years ago, and new ones that will come through this time.

In the meantime — and this is unfair, I admit, given I’m not letting readers respond in print — I want to just say that broadly I support a CGT.

Some commentators are pointing out that many of the wealthiest people work hard, give to charity and create wealth and jobs, and we don’t want to discourage that. But would they not do that if they were taxed on their realised gains — gains made when you sell something? They would probably still get to keep most of the money.

CGT happens in practically every other country we compare ourselves with, so the wealthy can’t easily run away from it.

And don’t mothers in South Auckland who work two jobs, on low pay, to feed their families also work hard — doing much less pleasant tasks in much less pleasant surroundings? Is it really fair that their income is taxed while that of people whose assets grow in value while they’re taking a break on their yachts is not?

Don’t forget, too, that if we bring in a CGT, the government will almost certainly reduce revenue from income tax, so that total tax revenue is unchanged. Many people — especially the less wealthy — will be better off.

It’s true that it’s hard to come up with a totally fair and easily administered capital gains tax. But New Zealand — as a late adopter — is in a great position to learn from other countries about what works best and adopt it.

I do hope we do that.

A Reader’s Story

Since mid April, to mark the 25^th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here’s another.

AYou’ve summed up many of my messages well.

Funny about the tortoise and the hare. You may have noticed in the April 15 column that marked the 25^th anniversary, that a picture of those two creatures illustrated my very first column!