Why I Sold My Air New Zealand Shares

Today I decided to sell my Air New Zealand (AIR) shares, not because I wanted to (I’m concerned that the IRD will mark me as a trader, instead of an investor for this), but because I felt forced to do so.

I originally bought my AIR shares because I saw them as a healthy dividend paying stock and thought they would sit nicely in my retirement portfolio with an uncomplicated, regular, not inadequate (above the value of inflation) dividend income. I also liked that as the nations flag carrier, with the government as the majority shareholder, there was some degree of protection in that. Boy was I wrong, as just 6 months after my purchase, the company is in a very different situation.

Why Did I Feel Forced To Sell My AIR Shares?

So, why did I sell my AIR shares, but not my other underperforming shares (such as AIA)? In short, one of the very reasons I bought AIR had fundamentally changed. Having the government as a majority shareholder went from being a benefit to a significant risk.

Since the government shut down travel by AIR (pun / dual meaning intended), Air New Zealand has obviously been struggling to the point where they’ve had to look at financing options. Here’s where it gets shady, and why I sold.

Like a number of private companies I own, the company has been offered (or possibly forced, given that the govt own 52% of the shares – I’ve not looked into the governance structure, to be sure of the influence) a loan from the government. This sounds nice of them to help out after they stopped the company operating, until you hear the terms of the interest rate they’re being charged – between 6% and 7% for the first $600m and 9% for the remaining $300m, of a total $900m loan. This will be hard to pay back, but that’s ok because the contract gives the option to convert the loan into equity.

This presents the risk a massive conflict of interest, in my opinion. After taking such an expensive loan, if AIR are unable to repay, the share price will be in a very bad position, which makes me wonder how much of the company could then be converted into equity to be owned by the government to cover the loan. Being the majority shareholder, I feel as though the govt could be (again, I don’t know much about the governance on the board of directors) in the position to block to other forms of fundraising (such as a capital raise) , damaging the company in order to serve their own interests to gain a larger shareholding. After going straight to an ~8% loan facility (rather than cheaper bonds or a capital raise, which would be more in the interest of other holders), I feel as though my minority shareholder interests are against the govt’s interests, and that the govt is using this to extract money from Air New Zealand.

It’s disappointing to have to exit my position, as I would have rather have had the opportunity to consider my position in a capital raise, and waited to see how the company performed in a couple of years in keeping with my investor strategy.

Anyone considering whether they should sell their shares may wish to research more about the governance of Air NZ, specifically how much influence the govt has over the board. They may also wish to look at the likelihood and scale of future capital raising (which decreases the value of your holding), and form their own opinion about the likely return to a successful position. Personally for me, I couldn’t see an easy way to be sure that the governance in the company represented my interests, or more specifically, wasn’t against my interests. Given this risk, the fact that the fundamental purpose for holding the stock was no longer valid, and the future risks to the business and my holding, I felt compelled to sell.


Do I Need To Repay The Wage Subsidy?

A few weeks ago I wrote an article about the economic future of NZ, in which I praised the government’s reaction to COVID19 and the associated financial policies arising from it. Specifically I said that I liked the wage subsidy as an implementation of Helicopter Money.

Why I liked it so much, is because it directed money straight to all businesses (small and large), and forced those businesses to ensure their staff were looked after. Trickle- Down Economics, anybody? I think this is better than Quantitative Easing because the money goes straight where it’s needed (though arguably there are better ways to implement Helicopter Money).

Every business owner I talked to, had applied for and got the wage subsidy. Comments on the no-questions-asked ease of acquiring the subsidy, along with the soft eligibility requirements of “…a 30% decline in predicted revenue…” and soft wording on repaying it, stating that you can repay it if you become no longer eligible, all suggested that the wage subsidy was actually Helicopter Money.

Now it seems that numerous large law firms are repaying the wage subsidy and the wage subsidy page on the Work and Income website is dominated by large red text talking about repayments.

So the question for employers is do i need to repay the wage subsidy? I don’t have the answer to this, but I suspect that the fact that the law firms are repaying it might be a clue.

In some ways it’s no surprise that the government is asking for the money back. In fact, I stated that there would be a need to replenish the coffers in the very same article in which I praised the wage subsidy policy. I’m just a little disappointed in the way the Work and Income website phrased the repayment, because for me, to say that you are eligible if you predict a 30% drop, then say that it has to be paid back if you are no longer eligible, I would have thought that having had predicted the 30% drop made you eligible.

Additionally I think that in the case of a growing company (especially those who have recently done capital raises or increased investment to fund growth), it’s quite possible that revenue could be up from last year, but 30% less than predicted. This could validly cause an increase in staffing costs that is not sustainable as returns didn’t fit the anticipated financial modeling, and such a company could be in need of the wage subsidy.

I think there’s scope for arguing a position here, but I suspect that increased need to replenish the coffers in the coming year may result in the IRD comparing past and present returns for those who kept the subsidy, and correspondingly auditing those who didn’t report at least a 30% drop. I expect that this will result in a lot of unpleasant words like “fraud” being thrown around.

It is my understanding that in cases where tax law is based on your opinion (such as whether you’re a share trader or share investor), the opinion of the taxman overrides any thoughts the business owner may have had on their intentions.

To leave on a positive note, while we may not have got any Helicopter Money, the alternative methods of replenishing the coffers are less attractive.

If you are wondering whether you need to repay the wage subsidy, you may wish to talk to your lawyer, accountant or ring the number on the Work and Income wage subsidy page that offers advice on whether you need to repay (though I expect in the case of any ambiguity, a ruling would not be in favor of these business).


Investors Vs Traders In NZ (Tax Law)

You might have heard stock market investors talking about share traders and share investors. These are two different types of stock market investors in terms of strategy, but this also has a significant impact on an investors tax implications.

NZ Tax Law defines two types of investors in shares: Traders and Investors. As usual with tax, the difference is grey and separated by “intention” – though it’s the IRD who will ultimately decide what your intentions were, so you’re going to want your intentions to be crystal clear.

What Is An Investor?

An investor is someone who buys shares with the intention of keeping them long term. They are investing in a company to enjoy the growth of a company with a view to getting an income as an owner of the company or having a long term exit plan.

Being an investor is arguably less stressful because investors don’t sweat the daily ups and downs of the stock market caused by market sentiment, as much as Share Traders do.

Investors typically use Financial Analysis (FA) techniques to justify their purchase, and try to purchase quality well run companies with good growth prospects, or speculative stocks.

From a tax perspective, investors do not pay Capital Gains Tax (CGT) in NZ.

What Is A Share Trader?

Share Traders buy shares with the view of playing the share market. They buy the lows and sell the highs, with lots of trades. They use Technical Analysis (TA) techniques and spend a lot of time looking at graphs to determine where the share price of a stock might go. They may also do Short trades.

Share Traders tax on their earnings at the end of the year, but I assume can recover their costs if their investments make a loss (you’ll have to talk to an accountant to confirm this).

It’s possible to be an Investor and accidentally become a Share Trader, say if you buy shares with the intention of investing, but then have to sell because you need the money or market conditions become unfavorable and you decide to exit, or if you’re learning and make some incorrect purchases that you need to remove from your portfolio. Again, your accountant will be the best person to advice you on this.