Saturday, April 15, 2006

Richard Inder: Forget Sir Rob's ghost, GPG is a special case

Sir Robert Muldoon was an ugly man.

It was not only his bulbous face, his manic grin, his menacing sneer and squat and corpulent build. It was also because he personified all that was distasteful in politics and business of the time.

This was period of our history when deals were done in backrooms over an emptied bottle of Johnnie Walker Red Label; when those who paid homage at the Beehive were rewarded with export subsidies, tariff barriers, billion-dollar Think Big contracts, import licences, quotas and tax relief.

For no good reason, those who did not meet the membership criteria of Rob's Mob, were bullied and shouted down, dismissed as deviants, unbalanced lunatics. They were ostracised on a pretence as minor as the slightest deviation from the code of the red-blooded, beer-drinking, meat-eating, rugby-watching, horse-betting man.

The political and business elites took on the character of the man who wielded the most power. They were secretive, self-interested and morally flawed.

In short, it was a time of special pleading. The result was inevitable: near bankruptcy.

Sir Rob is therefore the best reason for avoiding special pleading.

However, the planned changes to taxes on investments puts Sir Ron Brierley's Guinness Peat Group in such an intolerable position that politicians should rethink its case, even at the risk of invoking the ogre's spectre.

The plans disclosed this week have the very laudable aim of putting put all investment classes (in New Zealand at least) on an equal footing. In the future, cash invested in a managed fund of New Zealand and Australian shares will be exempt from tax on capital gains. This brings all investments in Australasian shares into line with investments in residential property here.

This approach has flaws but let's set those aside for the moment. The proposals also entail taxing individuals' direct share investments in countries other than Australia and New Zealand.

The operative words are Australia and New Zealand. The Government has decided GPG is a national of neither, as it is registered in the UK - the result of what executive director Tony Gibbs describes as a historical accident.

Many of its shareholders are therefore now facing a tax bill for gains on their GPG shares. Fund managers will also pay tax on GPG's gains, the same as they always have.

GPG says the changes will force it out of New Zealand. The plan would tip the tax regime so much in favour of Australasian shares that GPG would have to better an already stellar record if it was to maintain its rating.

The discount at which its shares trade to its net asset backing would inevitably grow. Any fresh capital raisings would dilute the wealth and fuel the anger of existing shareholders.

Large funds and high-net worth individuals have already begun selling the stock and where the big investors go, the minnows follow.

Shares will flow to a jurisdiction immune to such woolly thinking. And only when the majority of shares have left New Zealanders hands would GPG's rating be restored.

GPG is one of the the country's greatest wealth creators. An investor who bought $1000 of its shares shortly after Sir Ron took over 16 years ago, now has a call on $16,718 of assets. This gain is ahead of the returns generated by the FTSE, ASX, NZSX, and S&P500 indexes.

To put it another way, GPG is the Richie McCaw of business.

It is ironic, to say the least, that laws aimed at boosting New Zealand's woeful savings rate could expel one of our greatest wealth creators, especially at a time when New Zealand is already struggling to retain our best here.

It was only last week that Fletcher Building indicated it was looking at departing.

These facts seem to go over the heads of finance minister Michael Cullen and revenue minister Peter Dunne, who dismiss the threat.

GPG has already left, they say.

It is registered in London, so it cannot leave twice. And in any case most GPG investors have holdings that fall below critical thresholds so they are insulated from tax on capital gains.

Their answers display only their ignorance.

Gibbs wants an exemption. Most of GPG's directors are Kiwis and the company is a core shareholding of most New Zealand investors - through managed funds or direct investment. Indeed, almost 80 per cent of its shares are registered at a New Zealand address.

Granting his wish would invoke the spectre of Sir Rob, but it is not a decision that would cause the Government too many problems. Few, if any other companies, possess the qualities GPG puts forward to support its application: the makeup of its register and the number of its shareholders.

GPG deserves an exemption because it is the exception.

And in any case New Zealand tax law can hardly be described as principled.

The exemption of Australian shares from capital gains is entirely arbitrary, although based on the argument that the next port of call for New Zealand investors is the ASX.

Another option is a capital gains tax on all investment classes in New Zealand and outside (excluding the family home).

Without either, the long-term game for Gibbs and his fellow directors is to build a following in Australia. Once again our transtasman neighbours stand to benefit from our folly.


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