Saturday, April 15, 2006

John Armstrong: Labour returns to form after lapses

Pressure? What pressure? Housing Minister Chris Carter was a busy man on Monday afternoon - busy brushing off suggestions he heavied the board of Housing New Zealand into agreeing the Auditor-General should conduct the inquiry into the state corporation's accounting practices.

The board began the day insisting it was okay for its own auditors, Ernst & Young, to take another look at its books following a whistleblower's allegations of shonky behaviour.

It ended the day persuaded otherwise, having been taught a quick lesson in political reality.

Had Ernst & Young done the job and found nothing wrong, the Opposition would have cried "whitewash" and pinged Labour for not calling in the Auditor-General in the first place.

While publicly supportive of the corporation's board, the Prime Minister privately made it clear she wanted matters sorted before her weekly press conference on Monday afternoon.

The board found itself on the receiving end of some straight talking from Carter and the chief executive of the Department of Building and Housing, Katrina Bach.

Having got what was required, Carter judiciously spared the corporation further blushes by insisting it had U-turned of its own accord.

Putting the detail of the allegations to one side, the Government's management of the crisis was a return to form after the stumbles of recent months.

Labour kept the whole messy business at arm's length. It shut down Opposition lines of attack by agreeing the corporation's attempt to gag the aggrieved contractor-turned-whistleblower was foolish and wrong. It made sure the consequent inquiry is seen as truly independent.

However, while Labour was frantically turning on the fire extinguishers, the story did not catch fire with the public.

That has been par for the course. Labour has been bedevilled by problems of its making or embarrassed by ones emanating from the state sector. National once again found itself trying to make mileage out of yet another "scandal" which failed to excite voters.

Now, with the Government about to reach the six-month mark - it passes that milestone on Easter Monday - Labour is optimistic that it may also be turning the corner.

It has survived a bruising couple of months where National has thrown everything it could find at it in Parliament.

Senior Labour MPs believe that National will now have to rethink its strategy. While National is landing hits on Labour, they are having no lasting impact on Labour's popularity or the Government's stability.

This week's Herald-DigiPoll showed the Government is still trusted by the majority of voters. That would suggest Labour has a margin for error as long as it gets the fundamentals of governing right.

However, Labour might be better to treat the favourable polls as a get-out-of-jail-free card.

Apart from the troubles of David Benson-Pope and the resignation of David Parker, the past six months have seen puzzling lapses from experienced ministers. The Government has looked listless at the very time the numbers in the House and Labour's constant struggle against outliving its welcome mean governing is much more difficult.

Labour has taken an awfully long time to adjust to the fact it no longer dominates Parliament.

It has been slow to roll out a fresh policy agenda to avoid being typecast as a tired, third-term government.

These problems are in part down to the sweeping post-election Cabinet reshuffle. There is an acceptance in the Beehive that the switch in portfolios has seen some ministers take far longer to acclimatise to their new jobs than was expected.

In some portfolios, the Government suddenly seems far less surefooted.

That phase will pass. But the ministerial glitches have been accompanied by a more fraught relationship with the bureaucracy. There is frustration within Labour that some ministries seem incapable of generating fresh policy options or delivering results in line with the Government's expectations.

Things have not been helped by Labour's suspicion that some parts of the bureaucracy - such as the Treasury - did not get the election result they wanted.

On the parliamentary side, Labour has not only had to adjust to consulting with more parties, it has found itself ambushed in the House and in select committees.

How long the brave new world of parliamentary democracy where National's private member's bills become law and select committees launch inquiries at the drop of a hat actually lasts is a moot point.

Labour will not let this happen for much longer. It will likely barter policy trade-offs with its minor partners in exchange for them not embarrassing the Government.

On the policy front, Labour is now confronting the accusation it lacks fresh ideas by seeming to be very busy.

There have been a rush of announcements in the past two weeks ranging from the new Governor-General and the overhaul of tertiary funding to the tax treatment of overseas shareholdings.

Things will be cranked up again after the Easter hiatus with pre-Budget announcements leading to the delivery of the document itself on May 18.

The question is whether such bouts of activity indicate a solid programme - as the Prime Minister insists is the case - or are more a matter of keeping up appearances. Or a bit of both. The tertiary funding overhaul was bare bones stuff, whereas the tax treatment of investments was detailed policy.

Labour can be its own worst enemy when it comes to flagging its forward path. It assumes everyone knows what it is doing and then gets upset when critics accuse it of drifting.

Take the three new "government priorities" - economic transformation; families, young and old; and national identity.

Not exactly gripping stuff even in their expanded versions. But not only will the Budget be constructed around them, they are Labour's priorities for the next 10 years, and Government departments have been told to take them into account in "all their planning processes".

Yet, these priorities were made public without fanfare via the website of the Prime Minister's Department.

Clark has always had a dislike of such "vision" statements even though Labour needs them now more than ever.

Her priority has been to get her party out of its post-election trough.

That has seen her Maori MPs get the message to start selling Labour's policies rather than allowing the Maori Party a free run.

It has seen her already embark on a hectic schedule of provincial visits to win back the seats Labour lost last year.

It means getting her colleagues to realise they have to run faster just to stay still.

And it means telling errant state corporations exactly who is in charge.

Editorial: Redemption deserves a better deal

At the heart of every society in this world there is a religion. Its influence might not be acknowledged by most people today but it is there in the values they share.

Professed non-believers are usually the first to remind conservative Christians that tolerance and good will are supposed to be their guiding principles. But there is one Christian precept that seems to have disappeared from modern values though it is the defining principle of Christianity. It was the whole point of the events commemorated by Easter. It is the notion of redemption.

Redemption has a clear meaning in religious terms. Christ is said to have sacrificed his human life for the sake of everyone, so that offences may be forgiven and a faithful life may earn an eternal reward. The metaphysical elements of the story may be difficult to accept but the redemptive intention is not. It accords with many modern values yet redemption is not a word in secular use.

"Rehabilitation" is the nearest we get, when talking of criminal offenders and most people are sceptical about it even then. Rehabilitation usually means that a youthful offender has been helped to mature belatedly, and realise his own welfare is better served by obeying the law. Redemption has a more active and admirable quality. A person given the chance to redeem himself has an opportunity to re-assert a finer character by some act that overwhelms a previous error. It is an opportunity rarely given or taken these days.

Redemption is nearly as elusive in political life. Politicians might survive an embarrassment or misdemeanor but opponents will ensure we never forget it. This is the age of the political penitent, when the resurrection of any incorrect thing an elected person has ever said or done is liable to produce a bout of verbal chest-beating and apologies as abject as any medieval religious offender might utter. Yet it seldom softens the public reception.

This is also a time of the professional apologist known as a public relations adviser. When a commercial project encounters criticism a company is advised to roll over and run away on the principle that controversy is not worth winning. In the eyes of social puritans there is no redemption for private enterprise, even when it spends a small fortune on sponsorship and donations.

Charity is conscience money, they say, as if that discredits it, and sponsors are merely concerned for their "image", as if anyone is not. Redemption in a worldly sense is about earning a desired reputation and any company that does so deserves as much credit as a public- spirited individual whose work attracts notice.

Cynicism is the enemy of redemption. It makes the effort not worthwhile. Yet there is no sound reason to hold people to their occasional errors rather than their better efforts. Education is one area of life newly imbued with the spirit of Easter. Schools follow the principle that pupils respond best to relentless reinforcement of their self-esteem, to the point that their new assessment system is reluctant to recognise failure. That may be taking redemption to the point of delusion but the intention is good.

It might even produce a generation of adults ready to think the best of people, more willing to give credit where it is due and recognise that human beings are far from perfect creations. They are creatures with the appetites of animals and a brain that, for all its finer development, can be an instrument of greed, envy and the rest of the deadly sins. To err is human, they say, to forgive divine. The mistakes people make should be less memorable than their redeeming qualities but it is human to see it otherwise. Easter can raise our sights.

Fran O'Sullivan: Kiwis avoid harsh light of independent scrutiny

Before Kiwis pass judgment on the embarrassing disclosures daily made public in Australia over the role of its Wheat Board in channelling kickbacks to Saddam Hussein's Iraqi regime - let's ponder what might have been disclosed if governments here had the integrity to really plumb what was behind commercial disasters such as the failures of DFC New Zealand or Bank of New Zealand.

Unlike Australia, which appears to believe that "sunlight is the best disinfectant", New Zealand's power-brokers are more likely to indulge in high-level cover-ups when the proverbial hits the fan in relation to a government-linked commercial body. There was no public inquiry into the failures of either of these government-backed institutions.

Government reports which did finger high-profile players for their role in failing to avert the catastrophes were stamped "top secret" or "classified" and simply filed away, their subjects safe in the knowledge their reputations would be protected.

The only public inquiry of any consequence in recent times was into the "wine-box tax dodging" affair. Its terms of reference were not sufficiently broad or targeted to probe obvious questions and appeared concentrated more on disproving allegations by a prime protagonist, NZ First leader Winston Peters, than getting to the bottom of a disgraceful episode in our commercial history.

Contrast this with Australia. Yes - it's true that the Cole inquiry would not have been set up in the first place if it wasn't for the damning revelations in Paul Volcker's report into just who was rorting the United Nations' oil-for-food programme.

Volcker found the Australian Wheat Board was the biggest culprit channelling almost $A300 million ($353 million) in various "fees" into the coffers of Saddam and his henchmen. Australian Prime Minister John Howard could not ignore the Volcker report.

The resultant inquiry is relatively narrow, focusing on the Wheat Board's actions, not whether officialdom should have seen it coming and stopped the kickbacks from occurring. In essence, Cole has to determine whether the Australian Wheat Board or its officers broke any federal laws in their dealing with Saddam's regime. But some embarrassing truth has come out.

Australia's Department of Foreign Affairs and Trade (DFAT) came across information which suggested kickbacks were being paid - but says it was merely acting as a "post box". Diplomatic cable traffic between Canberra and New York highlighted the board's role. But, despite Howard's belief that the UN scheme had been corrupted, he did not become suspicious over the board's involvement until last year.

Deputy Prime Minister Mark Vaile - who is also Trade Minister - said he believed the board's denials because it was a highly respected company that was straightforward to deal with. Vaile had thought the claims were being driven by the board's competitors and stopped believing only when he had been told of the Volcker report's contents.

Foreign Minister Alexander Downer said he wasn't sure he had seen a critical cable sent in January 2000 drawing Canberra's attention to allegations made by Canada that Australia was paying kickbacks to Iraq. He was on the distribution list.

No one could explain why no further investigations were taken.

The important distinction between New Zealand and Australia is that first, our bigger neighbour is more inclined to allow inquiries to proceed even if Cabinet ministers will take reputational risk. Second: the Cole inquiry has been allowed to question not just government officials' actions but also that of ministers, right up to Howard himself - the first time this has occurred in 23 years.

It may not be empowered to make direct findings against the Government - yet.

Over here we've been very quick to take at face-value the results of an inquiry into how New Zealand dairy giant Fonterra benefited selling product to Iraq - through a Vietnamese intermediary - during the sanctions. The Vietnamese company was named in the Volcker report as having paid bribes to the Iraq regime. But the inquiries into Fonterra's actions were made by the Ministry of Foreign Affairs and Trade - not an independent party.

What assurances do we have over the level of checking that took place before MFAT could give the company a clean bill of health?

MFAT said it found no evidence the dairy giant simply evaded the sanctions by exporting product to Vietnam knowing it would be rebagged and sent on to Iraq.

Fonterra says: "We have always complied with New Zealand and UN sanctions with regard to trade with Iraq. Fonterra, and before it the NZ Dairy Board, have not sold dairy products directly into Iraq since UN sanctions were applied."

I'm not suggesting Fonterra had direct knowledge over the kickbacks to Saddam's regime which smoothed the way for the Vietnamese company to export such big amounts of product to Iraq. But with the "Powdergate" trial impending - which concentrates on whether dairy executives exported product under false labels to circumvent rules - I would have thought it more prudent to have undertaken an independent inquiry in the first place.

As it is, the questions will linger.

Brian Gaynor: Tax proposal rewards NZ investments

The proposed investment tax regime announced on Tuesday is positive for most investors. The clearest indicator of this is that the Government's annual investment tax revenue will fall by an estimated $110 million.

The proposals have negative implications for individuals who have invested in seven of the eight grey list countries: Canada, Germany, Japan, Norway, Spain, the United States and the United Kingdom.

The other negative group comprises companies that are domiciled outside Australasia but have a large number of New Zealand shareholders. These include BIL International, Guinness Peat Group and Richina Pacific. These companies will have to move to Australasia or lose some of their New Zealand shareholders.

There are three areas to look at when considering the changes.

* Are shares held individually or through a qualifying collective investment vehicle (pooled fund)?

* Are the investee companies based in New Zealand or offshore? Listed Australian-resident entities will be classified as NZ entities from April 1 next.

* The difference between tax on income (dividends) and capital gains.

Pooled funds

All pooled funds, whether they invest in New Zealand or offshore, are currently taxed at 33 per cent on both income and capital gains.

From April 1 next, pooled funds that invest in New Zealand or Australia will be exempt from capital gains tax. Income will continue to be taxed at 33 per cent except for individuals on a 19.5 per cent tax rate who may choose to have their income taxed at that rate.

The tax impost on pooled funds investing outside Australasia will remain the same.

The tax changes should encourage more New Zealanders to invest in the NZX and ASX through pooled funds. The proposals carry a slight incentive for individuals on the top tax rate to invest through pooled funds because dividends from their individually held shares will be taxed at 39 per cent whereas they will be taxed at 33 per cent in pooled funds.

The composition of the net $110 million annual tax revenue loss reflects the benefits to the managed funds sector. Approximately $110 million of tax revenue will be lost on NZ-orientated pooled funds and a further $40 million on Australian invested pooled funds and individually held investments in non-grey list countries.

On the other hand, the Government expects to collect an additional $40 million tax from individually held investments in existing grey list countries, excluding Australia.

Individually held investments

At present all individually held investments in New Zealand are not subject to a capital gains tax, unless the individual is a trader, and income is taxed at the individual's tax rate.

The same tax regime applies on both income and capital gains on investments in the eight grey list countries. Investments in all other countries are subject to a draconian unrealised capital gains tax regime, which has to be paid each year.

From April 1 next, there will be no tax on individually held investments in New Zealand and Australia, unless the investor is a trader, and tax on income will continue to be applied at the investor's personal rate.

There will be two main regimes as far as investments in all other countries are concerned.

1) Individuals with less than $50,000 invested offshore at cost will not be subject to a capital gains tax. For example, if an individual invested $20,000 in GPG in 1992, has no other offshore holdings and the GPG stake is now worth $210,000, then he or she will not be subject to a capital gains tax because the original investment cost less than $50,000.

2) Individuals with more than $50,000 invested offshore will be subject to a capital gains tax. It will apply to only 85 per cent of the capital gains, there is an annual 5 per cent cap as far as taxable gains are concerned, the carried-over tax only has to be paid when funds are remitted back to New Zealand, and the capital gains liability is completely removed when an investor dies.

The proposed offshore tax regime is complicated and best explained through the accompanying table.

An investor starts Year 1 with overseas investments worth $100,000 (column A). At the end of Year 1 these investments are worth $160,000 (B) and the investor received additional dividends of $6000 (C).

The total amount assessable for tax in Year 1 is $57,000 (E), made up of $51,000 (85 per cent of the capital gains of $60,000) plus the $6000 dividend.

As assessable income is the higher of 5 per cent of the opening investment and the dividends received, then the investor is only liable to pay tax on $6000 (I). At a marginal tax rate of 39 per cent, the total tax liability for Year 1 is $2340 (J).

The big difference between the old and new structure is that the investor will have to carry over taxable income of $51,000 (K) from Year 1 to Year 2.

In Year 2 this $51,000 (F) is added to the assessable income for that year but the taxable income is only $8000 (I) because that is the higher of the 5 per cent cap and dividends received. A capital loss (B-A multiplied by .85) in Year 3 doesn't reduce the tax paid, but it diminishes the assessable income carried over from Year 3 to Year 4.

Year 4 is a fantastic period for our hypothetical investor with the total value of the portfolio rising from $175,000 to $300,000 (A&B). The total tax payable that year is $4290 (J).

At the end of the year the investor has $169,800 of taxable income to carry over, but tax on this is only payable when the funds are remitted back to New Zealand. Offshore securities can be bought and sold without triggering the catch-up tax payment, but proceeds held in a foreign bank will be treated as money remitted back to New Zealand for tax purposes.

An important aspect of the proposals is that the carry-over obligation (K) will be completely abolished when the investor dies.

The actual tax paid in the four years is $13,260 (J), whereas under the existing grey-list regime the investor would pay tax of $13,182 on dividends (C). Thus the additional tax paid over the four year period is $78.

This tax structure is far less draconian than previously suggested and is clearly superior to the current non-grey list regime.

Non-Australasian companies

If non-Australasian companies are included in a New Zealand or Australian pooled fund then they will be subject to a capital gains tax, whereas the rest of the portfolio will not. This creates potential problems as fund managers may not want to hold a tax inefficient security in a pooled fund that is not subject to a capital gains tax.

GPG's Tony Gibbs is undertaking an intensive lobbying campaign to convince Government ministers that they should exempt his UK-based group and classify it as a New Zealand company. If Gibbs fails, GPG will have no option but to move the company to New Zealand or Australia.

* Disclosure of interest; Brian Gaynor is an investment strategist and analyst at Milford Asset Management.

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.