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Capital Gains Tax - The Tax Working Group

A SUMMARY OF SOME RECENT TAX REFORMS IN NZ

There is currently no broad based capital gains tax (CGT) in New Zealand, although certain “gains” are deemed to be income in certain circumstances. Income tax for example does apply to property transactions in certain circumstances, particularly in the case of speculation.

New Zealand’s last major program of tax reform occurred in the 1980s. This included the following changes:

  • The top marginal rate of income tax was reduced from 66% to 33% which was changed to 39% in April 2000, 38% in April 2009 and 33% on 1 October
  • Corporate income tax rate from 48% to 33% which was changed to 30% in 2008 and to 28% on 1 October
  • Goods and services tax was introduced, initially at a rate of 10%, then 12.5% and now 15%, as of 1 October 2010.

Land taxes were later abolished in 1992 and a CGT on property speculation was introduced in 1 October 2015.

THE TAX WORKING GROUP

A big portion of the recent Tax Working Group’s (TWG’s) final report focused on the question of whether New Zealand should adopt a comprehensive CGT. The final recommendation make it clear that it’s really just the start of the change process. The debate will be further heightened by the design chosen for any extension of the taxation of capital; whether it is a comprehensive CGT or a less radical reform of existing tax rules. The Government has committed to issuing their response to the report in April which will be tested with the electorate in the 2020 election. The Interim Report has set out a guide by which any CGT should be evaluated: “In broad terms, will the fairness, integrity, revenue, and efficiency benefits from reform outweigh the administrative complexity, compliance costs, and efficiency costs arising from the extension of capital gains taxation?”

The TWG’s members are themselves not fully united on whether a CGT satisfies the above statement, with a minority rejecting it because of perceived inefficiency and compliance costs. For the majority, however, the recommendation for a CGT seems to be firmly bedded in the notion that it would increase the fairness of the tax system.

In seeking to create fairness, the proposal creates a number of layers of unfairness. For example:

  • Is it fair that someone who buys an asset is taxed on the full amount of any gain when part of that gain is simply inflation? How will they be able to re-invest in a new asset if the inflation element is taxed?
  • Is it fair that the family home and artwork are excluded but most other property is not? Consider a sole trader who has a $500,000 house and a $500,000 commercial building who would be taxed on the disposal of the commercial building. Should they have bought a $1,000,000 house, rented a business premise and enjoyed a tax free capital gain?
  • Is it fair that that investors in New Zealand shares would pay tax on capital gains but investors in foreign shares would continue to be subject to the 5% FDR rate even if gains are less or more?
  • Is it fair that small business could sell assets and defer the CGT bill if they reinvest the proceeds, while medium and larger size business cannot?
  • Is it fair that property could pass on death without an immediate CGT cost but gifts made to children during one’s life would be taxed?
  • Is it fair that there are proposed tax reductions for KiwiSaver to compensate for CGT but not for other forms of investment?

Everyone will have their own perspectives on the overall implications of what’s proposed. The only certainty being that the political difficulties of the debate will far outweigh the policy deliberations.

In summary some of the key issues are:

  • It is recommended that a CGT apply to any gains on New Zealand shares and that the current level of taxation on foreign shares remains unchanged. There are potential negative impacts for New Zealand capital markets of raising the tax on this asset class not including international shares.
  • If selling a low performing asset will result in a CGT bill, then a business may not be able to afford to reinvest in a higher yielding asset. This risk has in part been recognised with a recommendation to provide roll over relief where such funds are reinvested, however that recommendation only applies to businesses with turnover of up to $5million.
  • Why should the transfer of assets from one generation to the next have to wait for death to occur? It may be more productive for family businesses to be able to pass assets from generation to generation before then, without crystallising a tax liability?
  • In the event of an economic downturn, capital losses will be able to be offset against other income This has the potential to add unpredictability into the Government’s accounts.

The above are just some of the wider questions that a CGT raises. The question of whether a CGT is right for New Zealand is far from black and white. Instead there are a spectrum of choices. All have their own consequences which need to be taken into account and ultimately sold to a voting public.

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