Tax Watch: Edition 1, February 2019
The final report of the Tax Working Group (“TWG”) was released on 21 February 2019. Among the many recommendations, the biggest was for a comprehensive capital gains tax. We explain how the proposed tax would work, the assets affected, available relief and how it may impact your savings and investments. We also discuss other recommendations relating to the taxation of businesses, charities, retirement savings and the environment.
Tax Working Group recommends taxing capital gains
While the TWG has recommended a comprehensive capital gains tax, the decision to do so was far from resounding. Three members have broken away to offer their own views.
The centrepiece of the final report is a potential design for a capital gains tax (“CGT”). In broad terms, the TWG proposes that the tax be imposed on a realisation basis (generally when you sell). The realised gains on all included assets from the effective date will be taxed at marginal rates without allowances for inflation. We see this as a move from under-taxation to over-taxation. Capital gains taxes in other jurisdictions are less harsh.
The TWG note that the main industries affected by currently untaxed capital gains are: agriculture, forestry, fishing, property and financial services. While CGT is the big-ticket item, there are almost 100 recommendations so there is no doubt that every New Zealander will be affected in some way.
While the TWG’s views are now in the open, whatever form the ultimate proposal will take depends on the government’s final response in April 2019. Finance Minister Grant Robertson and Revenue Minister Stuart Nash say it’s unlikely all recommendations will be implemented. What ultimately comes into force depends on the result of the next election.
- What’s in the base – the asset classes that will be subject to (or excluded from) the proposed capital gains tax and how the family home exclusion would work.
- Calculating capital income – an overview of how a taxable capital gain will be calculated, issues regarding the over-taxation of nominal gains and the requirements for obtaining rollover relief.
- Transitionary measures – the use of a ‘Valuation Day’ approach where taxpayers will be expected to obtain market price valuations on their included assets at the date of implementation.
- Taxing shares and managed funds – how the capital gains tax would interact with existing tax regimes for New Zealand shares, foreign shares, KiwiSaver and managed funds.
- Minority Report – the alternative view offered by the members of the TWG opposed to a comprehensive capital gains tax.
- Changes to business taxation – the recommendations around taxation of businesses, including loss continuity rules, building depreciation and seismic strengthening expenditure.
- The best of the rest – other report highlights, including the tax treatment of retirement savings, environmental taxation, the future of work, charities and tax administration.
Get in touch with us today if you would like more information on how the proposed changes could affect you or your business.