Capital gains tax proposal – An overview
18 March 2019
The recent release of the Tax Working Group's (TWG) Final Report has ignited a lot of public interest in tax policy, perhaps at a level not seen before. Although the Final Report addresses various tax issues, debate has centred in on the TWG's broad introduction of capital gains tax (CGT) in New Zealand, as recommended by its 8:3 majority.
What is being proposed?
There is currently no official CGT in New Zealand. However, as many people know, there are a number of mechanisms in the Income Tax Act, which could be seen as taxing capital gains. For example, the 'bright-line' test requires income tax to be paid on any gains made from certain residential property sold within five years of acquisition.
The TWG is now proposing that New Zealand implements an official CGT. In a nutshell, it supports a CGT on a broad range of assets, with few exceptions and no allowance for inflation. Such a proposal is estimated to raise approximately $8.3b for the Government over the next five years.
The TWG's key recommendations include:
- Scope: A CGT on gains made from all types of land and improvements, shares, intangible property and business assets. Notable exceptions to this rule include the family home, personal-use assets and some collectively-owned Māori assets. Taxation would occur on the realisation of the capital gain, and as mentioned, would not account for inflation. An allowance would, however, be made for capital losses
- Rate: Taxpayers would be taxed at their marginal tax rate. They would not be compensated for being pushed into a higher tax bracket because of realising a capital gain
- Valuation: Only gains arising after the implementation of the CGT will be taxed. Taxpayers would have five years to determine the value for their CGT-assets.
Why suggest reform?
Not surprisingly, the CGT recommendations have received a lot of public feedback. As one commentator puts it, responses range from "good in theory but too hard to implement" to the more extreme "they want to steal my money and sell my children".
A key policy argument behind the proposed CGT is that the current inconsistent treatment of capital gains simply benefits the wealthiest members of society, and instead New Zealanders should each be making a fair contribution to the tax system. The majority of the TWG believes that its recommendations achieve that policy objective.
However, more important to the public should be the Government's stance on the TWG's Final Report. The Government is not bound by any of the TWG's recommendations, and so far Finance Minister Grant Robertson has said that it is highly unlikely that all of the TWG's recommendations will be implemented.
What do we expect?
A number of commentators suggest that adopting the TWG's broad CGT would be politically difficult for any Government. However, it is highly probable that at some point, an official form of CGT will be introduced. Doing so would bring New Zealand more into line with the rest of the OECD.
Any CGT regime introduced would most likely be a heavily watered-down version of the TWG's proposal. It will also no doubt be shaped by the realities of the MMP environment. In particular there is broad consensus for a CGT on residential rental investment properties. All TWG members agreed to this and it is perhaps the easiest starting point for extending New Zealand's current CGT.
The Government is expected to announce whether it take on any of the TWG's recommendations in April. Any new legislation would be passed before the next election and would come into effect on 1 April 2021.
A copy of the TWG's Final Report is available on the TWG's website. Due to the level of interest in the Final Report, Buddle Findlay will be publishing a series of legal updates on the CGT proposals. Keep an eye out for our upcoming updates on:
- What a CGT will mean for small-business owners
- Will the contradictory nature of incentivising New Zealanders to prepare for their retirement and now taxing them work
- Whether a CGT on shares will incentivise public investment in overseas shares.
This update was written by Tony Wilkinson (partner) and Aimee Moss (summer clerk).