Blog

A ratings downgrade is never ideal. Depending on who you believe, it could be an indictment on the government’s fiscal control of the economy, likewise it could be seen as the ratings agency being more sensitive to total net external debt (that is, private sector debt).

Effectively what it means is that the perceived ability of New Zealand to be able to pay back debt has been impeded from where it sat before the downgrade.

Traditional economics would tell us that the downgrade means an increased credit risk, vis-à-vis an increased cost of borrowing (for us – business and mortgage debt), and capital flight from foreign investors into safe haven countries (those with the highest credit rating). The capital flight would then push down our exchange rate, making it more expensive for us to buy from overseas, but easier for exporters to sell their products internationally.

As I say, that’s what traditional economics would tell us, and sorry if it was getting too jargonesk. What’s more interesting is to study those traditional indicators, and to see what’s really happening.

Before the Standard and Poors, as well as Fitch downgrade, NZ to US dollars were trading around $0.76, today it’s trading at, well, give or take $0.76 – there was a slight dip in the middle there, but it appears the currency has remained materially stable.

What about the thing that matters to most of us – interest rates? Well Darren Gibbs from Deutsche Bank has said that the “at the margin, it will probably raise the cost of funding but, in the scheme of things, it's not that huge", meaning we may well see a flow on of increased interest rates, but it’s unlikely to be material.

In an interesting turn of events, there is widespread speculation that the credit rating downgrade could keep the Official Cash Rate (OCR) down at 2.50% for a longer period of time. Which could see interest rates staying lower over the medium term – though I cogitate.

Yes, the government is spending too much on areas such as working for families and interest free student loans, and yes, private savings in New Zealand suck. In saying that, in the first time in a decade household consumption as a percentage of income has dropped below 100% (from a peak of 108%).

The reality is, we still hold an AA rating with a stable outlook, and we are just squabbling over the degree of excellence that we enjoy. 

Gift duty has been around in New Zealand since 1885. It was originally established to make sure people didn’t simply gift their belongings on the deathbed, avoiding the imposition of death duty tax.

Death duty was abolished in 1992, however the Government at the time felt that gift duty was a useful mechanism to avoid tax planning, so kept it on the books.

With valuation of annuity data 25 years out of date and no provision for electronic filing of gift statements, the law had became antiquated.

There were recent revelations that gift duty costs New Zealanders $70 million a year in compliance – an aggregate of people paying their accountants and lawyers – while only providing the IRD a net one million of revenue a year. Eventually, the government made the decision to get rid of it

Come October the first it finally happened, Gift duty was repealed in New Zealand.

The key features of the change are:

• Gift duty will not be payable for dispositions of property made on or after 1 October 2011.
• Gift statements will not need to be filed for dispositions of property made on or after 1 October 2011.
• Gift duty and gift statements will remain due for dispositions of property made prior to 1 October 2011.

It’s important to note here that Work and Income will still test for gifted assets when assessing benefit levels (Residential Care Subsidy) including as they operate under a different model.

There are plenty of consequences of this change, including people’s ability to immediately alienate property by putting it into trusts, which has benefits, but can also mean unintended loss of control if not carried out cautiously.

Further, if the Inland Revenue believe that a gift is motivated by tax avoidance, they can still challenge and reverse the gift. So there is still a place to speak to your favourite accountant.