New Zealand

INVESTING IN NEW ZEALAND

Foreigner investors are grabbing more of New Zealand and extracting huge profits from their investment, says New Zealand First’s economic development spokesman Doug Woolerton.

Figures released by the Finance Minister in Parliament today show that the total inflow of foreign investment into New Zealand was $26 billion in the year ended 31 December, while income from foreign investment was $16.2 billion in the same period. “Foreign investors are getting massive returns on their investments in New Zealand. For a total of $89 billion invested into New Zealand since 2004, foreigners have extracted $65 billion in profits.

New Zealand welcomes and encourages foreign investment from all countries, without discrimination. The general policy is based on the premise that proposals should be approved unless good reason exists, in terms of the legislative criteria to decline an application.

Non-residents can participate in a wide range of economic activities in New Zealand, directly or indirectly, through various mechanisms including companies, partnerships and trusts.

The Overseas Investment Office administers the New Zealand Government’s foreign investment policies. The core work of the office is to assess applications for consent from foreigners who intend making substantial investments in New Zealand.

Under the new Overseas Investment Regulations 2005 an overseas person will require consent to acquire

• Land that exceeds 0.4ha (4000m2) and includes or adjoins the bed of a lake.
• Land that includes the foreshore.
• Land in excess of 0.2ha that adjoins the foreshore.
• Land that is 5ha or greater.
• Land that is greater than 0.4ha and adjoins or includes heritage, conservation or historic areas.
• Business or non-land assets worth more than $100 million.

The New Zealand government promotes direct foreign investment primarily through two bodies - the Ministry of Foreign Affairs and Trade (MFAT), and the government's trade promotion agency, the New Zealand Trade Development Board (TRADENZ). Other government agencies, such as the New Zealand Tourism Board and the Ministry of Forestry, are also active in promoting foreign investment in their respective sectors.

Although parallels are often drawn between the lifestyle offerings of New Zealand and South Africa, this Pacific island is successfully attracting a host of skilled professionals who are investing in property and assisting in rapidly transforming the economic and social climate.

New Zealand’s lifestyle has often been compared to that of South Africa, and perhaps not surprisingly their property market, which saw the second highest growth worldwide after SA in 2004, is reflecting similar trends.

However, New Zealand seems to be overtaking SA in successfully attracting a more competent international workforce, lured by the crime-free lifestyle, exciting employment opportunities and attractive property offerings. Over 50% of all property sales are to foreign investors – keeping the top end of the market on a strong upward price trend.

Barak Geffen of Sotheby’s International Realty South Africa says, "In SA, we should follow the example of New Zealand and not be over-anxious about foreigners pushing the price of property out of the reach of the previously disadvantaged. We should rather focus on improving the living standards of all citizens, especially the previously disadvantaged, by attracting much-needed foreign skills to SA. This would, amongst other things, improve our export competitiveness and create more jobs to the benefit of all."

According to Russell Redell of Sotheby’s International Realty Queenstown, who was in South Africa recently to present information on the New Zealand market to Sotheby’s affiliates in SA, this economy-boosting foreign investment has enabled New Zealand to offer its residents excellent social security and national health services that the government may not have been able to provide previously.

Redell says that even as a foreigner on holiday, should you be injured, the state will provide all the medical care you need, free of charge, such is the sophistication of their infrastructure and planning.

As in SA, New Zealand has caught the imagination of many foreign investors and tourists, spurred on by the film industry. This has assisted in exposing us to the world with recent epics such as the "Lord of the Rings" trilogy. At the same time, our rapidly growing tourism industry has helped underpin the property market, especially for more expensive properties. Queenstown alone receives over a million tourists a year, compared to the country’s entire population of only 4.2 million. There is also no newsworthy crime or urban decay problems that one would find in most big cities.

"Another appealing and differentiating factor about New Zealand is that one pays no capital gains tax (CGT) and can get attractive fixed interest rates at 7.9%, prime currently being 8.9%."

Geffen says that although SA’s foreign sales are nowhere near the high proportions seen in New Zealand, many lower income and first-time homebuyers are now battling to find a foothold and are resorting to renting, which Reddell confirms is a similar case in New Zealand.

"Property in most first world countries is now notoriously expensive, but residents accept that this is progress. Rather than seeing foreign investment as a problem, South Africans should embrace it as helping to improve social provisions and having the knock on effect of providing more employment and earnings for all, as has been seen in New Zealand."

In recent years stock market investors have done well in New Zealand. The major index, the NZX50, has risen by over 80 percent in the last 3 years (to May 2006) while the midcap index has risen by almost 100 percent.

New Zealand's advantageous tax regime, coupled with the favourable performance of its stock market, has significantly increased investor's wealth in the last few years.

New Zealand as a Stock Investing Tax Haven
One major incentive for investing in the New Zealand and Australian stock markets is that New Zealand has no capital gains tax.

Provided you are an investor living in New Zealand, there is no tax to pay when you sell your investments in New Zealand or Australia for a profit. (People living in Australia do pay capital gains tax.)

If, however, you are a share trader, (buying and selling shares frequently for a profit), your profits will taxed as part of your income.

Caution: New Zealand's lack of capital-gains tax is unusual in the developed world. It would be imprudent to make residence decisions based solely on the fact that there is currently no such tax. It is possible a tax could be introduced in future. The likelihood of this seems to be low at the moment. As recently as May 2006 the New Zealand Finance Minister, from the centre-left Labour Party, has said that such a tax would not be introduced. The minister is also on record as saying that introduction of such a tax would be "electoral suicide".

Special Provisions for Migrants

For new immigrants there is a four-year tax exemption on overseas holdings. The exemption also applies to returning New Zealanders who have not been resident for tax purposes for at least 10 years before their arrival.

The New Zealand Stock Market

New Zealand is a small country. The largest companies traded on its stock exchange, the NZX, would not be considered large in countries like the US or UK. Many of New Zealand's companies would be considered to be microcap stocks in the United States. New Zealand's largest company (NZ Telecom) is worth about US$6 billion.

If NZ Telecom were a British Company, it would be too small to qualify for membership of the FTSE 100. If NZ Telecom were a US company, its size would qualify it for inclusion in the Russell 1000 index of the United States 1000 largest companies. In 2005, the median value of a company in the Russell 1000 was US$4.6 billion.

One of the drawbacks of operating in a small country is that; in order to grow significantly, New Zealand companies need to expand into other countries. Some companies, such as Michael Hill Jewellers and Fletcher Building, have done this successfully - in Australia. Others, such as NZ Telecom, Air New Zealand, Pacific Retail Group and The Warehouse have floundered badly when trying to expand into Australia or the UK, losing shareholders' money in the process.

Despite these problems, in recent years New Zealand has enjoyed healthy economic growth and New Zealand stocks have outperformed US and UK stocks. With the economy slowing in 2006, however, it is uncertain whether the NZX will continue to outperform its much larger rivals.

Buying and Selling Shares in New Zealand

Most banks, such as ASB and National Bank, offer online share trading facilities. Shares can be bought or sold over the Internet for a fee of around NZ$30. The small size of the New Zealand stock exchange means that liquidity is much lower than in most stock markets. Trading shares in some of the smallest companies can take several days because there may be few other buyers or sellers.

Investing in Overseas Stock Markets from New Zealand

From 2007, if you are resident in New Zealand and have more than NZ$50,000 worth of investments overseas, you will pay tax at your normal rate on a small proportion of your holdings.

Shares in New Zealand and Australian companies are exempt from overseas tax provisions.

Examples of Offshore Investment Tax

Example 1

Portfolio: You have $45,000 invested overseas. During the year, it increases in value to $49,999.

• Tax to pay: None
• Reason: Your overseas portfolio is worth less than $50,000.

Example 2

Portfolio: You have $100,000 invested overseas. During the year, it decreases in value to $99,000.

• Tax to pay: None
• Reason: You have made a capital loss. Losses are not taxed.

Example 3

Portfolio: You have $100,000 invested overseas. During the year, it increases in value to $104,000.

• Tax to pay: You will taxed at your normal rate on $4,000. If your normal rate is 33 percent, you will pay $1,333.33 in tax.
• Reason: If your gain is less than five percent of your portfolio's value at the start of the year, you are taxed on the actual gain.

Example 4

Portfolio: You have $100,000 invested overseas. During the year, it increases in value to $112,000.

• Tax to pay: You will pay tax on $5,000. If your normal rate is 33 percent, you will pay $1,666.67 in tax.
• Reason: If your gain is more than five percent of your portfolio's value at the start of the year, you are taxed on five percent of the portfolio's value at the start of the year.