Capital gains tax
Tax Working Group proposals
The much-anticipated final report of the Tax Working Group (TWG) was released on 21 February and, unsurprisingly, recommended the introduction of a broad-based, realised capital gains tax (CGT) regime.
A summary of the recommendations is below.
What will be taxed?
- All forms of land (except the family home), shares, intangible property and business assets. The TWG recommends excluding personal use assets such as cars, boats, jewellery, fine art, collectibles and other household durables
- Only gains arising after ‘valuation day’ would be taxed, and
- 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. This would impose an estimated $4.5 billion compliance cost on affected taxpayers.
When will it be taxed?
- CGT would apply on a realised basis only but would be subject to a number of concessions/exclusions referred to as ‘rollover relief’
- Rollover relief would apply to all inherited assets, assets donated/gifted to donee organisations (charitable entities), certain involuntary events where the proceeds are invested in a similar replacement asset, eg: an insurance event/natural disaster, certain business restructures, small business rollover where funds are reinvested in a replacement business
- In terms of gifted assets, rollover relief would apply where the gift is to the person’s spouse, civil union or de facto partner but otherwise would not qualify for relief
- CGT would be imposed at the person’s marginal tax rate. The TWG recommends against adjusting for inflation or discounting the tax rate
- The cost of an asset including capital improvements can be deducted against sale proceeds to arrive at the taxable capital gain. Holding costs such as interest or rates would not be claimable against personal use assets, and
- Subject to limited exceptions, capital losses should generally be capable of set-off against both ordinary and capital income.
Transitional rules
A number of transitional rules for assets held on valuation date are also proposed including:
- Flexible and default valuation rules for valuation date assets mandated by Inland Revenue
- A median rule for assets held on valuation date where the ‘cost’ to be deducted from proceeds to determine the capital gain amount will be the middle value of actual cost (including improvements), valuation date value and sale price. The intention is to stop artificially high valuations being adopted at valuation date, and
- Transitional rules for immigration/emigration, and changes in use.
Who is taxed?
New Zealand tax residents will be subject to CGT on worldwide assets. Non-residents will be subject to CGT only on New Zealand-sourced capital gains.
Company matters
In a nutshell, there is some discussion dedicated to the potential for double taxation and double deductions for gains and losses in the corporate context. For example, a company is taxed on realisation of an asset and the shareholder may be taxed again on the same underlying gain via the increased share value.
Imputation continuity rules: The TWG recommends the continuity rules governing the carry forward of imputation credits be removed.
Foreign shares: The current regime dealing with interests in foreign investment funds (FIF) is to be retained with some possible refinements. However, CGT will be imposed on foreign shares which are not currently subject to the FIF regime.
There is also some discussion around portfolio investment entities including KiwiSaver funds. At a very general level, the proposal is that these entities will also be subject to CGT on investments not dealt with under the FIF regime.
Dissenting views in the TWG
Three of the TWG’s 11 members disagree with the TWG’s recommendation to introduce a comprehensive CGT regime. Their collective view is that the costs of introducing the proposed CGT regime would clearly outweigh the benefits.
They suggest an incremental extension of the tax base over time, ie: extending the tax base on an asset-by-asset basis. In their view, an extension to the taxation of residential rental properties is the most obvious starting point.
Our thanks to nsaTax for writing this commentary.