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TWG Recommends Capital Gains Tax (First Report) 2018

AUTHOR: Matthew Gilligan

POSTED: 23 September 2018

The Tax Working Group has released its interim report on its review of the NZ tax system. The interim report discloses the TWG's direction as it pushes towards finalising its recommendations in February 2019.

While the report at 194 pages covers a wide range of topics within the realm of tax reform, I would like to relay some detail in regard to proposed capital gains tax that would be of most interest to those of you who are property investors, developers and business owners. Bear in mind that we are a long way away from any proposals being effective law, given that once the TWG makes its final recommendations in February 2019 the Government then has to decide what recommendations it wants to implement. In regard to capital gains tax (CGT), Labour's pre-election pledge was not to implement any such tax prior to the next election. This could mean, however, that legislation is passed prior to the election with the effective date being post-election. Suffice to say we are in early days at the moment, but there are some interesting aspects to the interim report.

In the context of CGT, a quick highlight package of the interim report is as follows:

Implementation of a land tax or a wealth tax are ruled out. The TWG is not in favour of either of these measures being implemented.
Although the TWG is still forming its view on how the tax system could be extended to incorporate capital gains, the presumption has to be that they will be recommending this in the final report.
They have noted that the key question in determining whether CGT should be implemented or not is based on whether or not the fairness, integrity, revenue and efficiency benefits will outweigh the administrative complexity, compliance costs and efficiency costs.
When talking about design features of a new CGT, the report confirms that there will be exemption for the family home, although interestingly as a side comment, they wonder whether there should be a limit on the value of a home in order to qualify for the exemption. While acknowledging it is outside their brief to consider the inclusion of a home as subject to the CGT, they go on to raise the possibility of there being, for example, a $5m limit on the home exemption.
They are of the view that CGT should apply across assets broadly, so not just restricted to property. It would also apply to shares, intellectual property, goodwill, business assets and certain choses in action (i.e. legal rights).
Taxable capital gains would be treated just like any other form of income so that there would not be a different applicable tax rate.
Quite some discussion is dedicated to how capital gains should be calculated. The TWG is considering two options. The first is taxing on a realised basis when the relevant asset is sold. The second is effectively taxing on an accrual basis with there being a deemed rate of return applied on an annual basis.
If a realisation method is pursued there will likely be a valuation date at the point of the implementation of the new regime so that it is gains beyond that date for existing assets that are taxed.
There is discussion around whether losses on capital assets should be ring-fenced or whether they will be available to be offset against all forms of income. Generally speaking, the TWG seems more supportive of not ring-fencing losses, subject to some exceptions.
The TWG has ruled out housing affordability as a motivating factor for tax reform, noting that in their view it has a limited impact, with shortage of supply versus demand being the main cause of housing unaffordability.

In summary, there is a lot of water to flow under the bridge yet, but it seems to me that the TWG is tending towards recommending CGT, although they do seem mindful of the huge complexity that this will entail and conscious of the need for the benefits to outweigh the consequential cost. We shall await with interest their final report in February.

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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