What is Capital Gains Tax and how does it effect you?
The final report of the Tax Working Group (TWG) was released on 21 February and as many of you will be aware, recommended the introduction of a broad-based, realised capital gains tax (CGT) regime.
Eight of the eleven members of the TWG agreed to a comprehensive capital gains tax. Those that didn’t agree believe the costs associated with introducing a CGT regime would outweigh any benefits. They felt that the compliance and administrative costs would outweigh the revenue collected. concerns over the timeframe proposed to introduce the rules and recommendations.
The final report is 206 pages and for those keen to digest the total report, can download it here. The recommendations are substantially the same as those contained in the interim report released in September 2018. The government will respond formally to the recommendations and this expected sometime in April. Following is a summary of the recommendations. Presented by the TWG:
Eight of the eleven members of the TWG agreed to a comprehensive capital gains tax. Those that didn’t agree believe the costs associated with introducing a CGT regime would outweigh any benefits. They felt that the compliance and administrative costs would outweigh the revenue collected. concerns over the timeframe proposed to introduce the rules and recommendations.
The final report is 206 pages and for those keen to digest the total report, can download it here. The recommendations are substantially the same as those contained in the interim report released in September 2018. The government will respond formally to the recommendations and this expected sometime in April. Following is a summary of the recommendations. Presented by the TWG:
What will be taxed?
- All forms of property except the family home, shares, intangible property, and business assets. It is recommended that personal use assets such as cars, boats, jewellery, fine art, collectibles, and other household durables should be excluded.
- Only gains arising after ‘valuation day’ would be taxed.
- Taxpayers would have up to five years to determine the market value of assets as at valuation day. If a valuation is not obtained, a ‘default rule’ would apply.
When will it be taxed?
- CGT would generally apply on a realised basis only (although there appears to be some exceptions to this – with regards to rollover relief).
- Exemption would apply to all inherited assets, and assets donated or gifted to donee organisations (charitable entities), Certain involuntary events where the proceeds are invested in a similar replacement asset e.g. an insurance event/natural disaster, a business restructure where there is no change in ownership in substance, small businesses where proceeds from included assets are reinvested in a replacement business would also be exempt.
- In terms of gifted assets, rollover relief would apply where the gift is to the person’s spouse, de facto, or civil union partner but otherwise would not qualify for relief.
- CGT will be imposed at the person’s marginal tax rate and the working group does not recommend an adjustment for inflation or that the tax rate should be discounted (as is currently the case in Australia).
- The cost of an asset including capital improvement can be deducted against sale proceeds to arrive at the taxable capital gain. However, holding costs such as interest or rates will not be claimable against personal use assets.
- Capital losses should be capable of set-off against both ordinary and capital income. That is, they should not be ring-fenced and claimable against only capital gains. However, there are several exceptions proposed to this rule, the most notable being that capital losses from personal use assets cannot be claimed against either ordinary income or capital income. Others include losses generated from associated person transactions, where rollover relief is available but the taxpayer chooses not to apply them, losses arising on assets held on valuation date.
Transitional Rules
As expected, there are a number of transitional rules for assets held on the valuation date.
Residents vs Non-Residents
Consistent with our existing tax regime, a New Zealand tax resident will be subject to CGT on worldwide assets. Non-residents will be subject to CGT only on New Zealand-sourced capital gains.
Company - Double Tax?
There is significant discussion dedicated to the potential for double taxation and double deductions for gains and losses in the corporate context. For example, a company sells an asset and derives a capital gain on which it is taxed. A shareholder then decides to sell their shares before that capital gain has been distributed. Inherent in the value of the shares is the capital gain derived by the company. This potentially leads to the same gain effectively being taxed twice i.e. the company is taxed on realisation and the shareholder is taxed again on the same underlying gain via the increased share value.
The TWG concludes the market will take care of this issue in terms of widely-held entities and in relation to closely held entities, these issues can be managed by distributing said gains before the share sale.
The TWG concludes the market will take care of this issue in terms of widely-held entities and in relation to closely held entities, these issues can be managed by distributing said gains before the share sale.
Company - Imputation continuity Rules
Of particular interest is the suggestion that the continuity rules for imputation credits be removed (these rules currently require the same shareholders to hold at least 66% of the shares in a company in order to carry forward imputation credits).
Company - Liquidation
The TWG acknowledges that the rules dealing with distributions from a company on wind-up will need to be modified to ensure pre-CGT gains are not to be taxed on final distribution.
Closing Comments
A lot will be said over the coming months about the proposed regime and if the government is to get it across the line, given Winston Peter’s election promises, otherwise the money spent and the time taken could all have been to no avail.
There is also one obvious recommendation that the TWG has overlooked entirely and : we recommend the Prime Minister wanders down the hallway and has a quiet word with Winston to determine whether he is in support of a broad-based CGT regime. If not, the Interim and Final Reports will make for useful doorstops but that’s about all. A quick discussion between these two could save us all a great deal of time and effort debating this issue, not to mention millions of dollars of taxpayer funds drafting legislation and undertaking the consultation process.
For any further information about what a New Zealand capital gains tax might mean for you, please don't hesitate to contact our team of property lawyers. We are happy to provide property law advice on house buying and house selling, or any other conveyancing query you have.
There is also one obvious recommendation that the TWG has overlooked entirely and : we recommend the Prime Minister wanders down the hallway and has a quiet word with Winston to determine whether he is in support of a broad-based CGT regime. If not, the Interim and Final Reports will make for useful doorstops but that’s about all. A quick discussion between these two could save us all a great deal of time and effort debating this issue, not to mention millions of dollars of taxpayer funds drafting legislation and undertaking the consultation process.
For any further information about what a New Zealand capital gains tax might mean for you, please don't hesitate to contact our team of property lawyers. We are happy to provide property law advice on house buying and house selling, or any other conveyancing query you have.