New capital gain tax proposed by the Tax Working Group

There’s been a lot of discussions in the last couple of days regarding the new capital gain tax (CGT) proposed by the Tax Working Group (TWG). While we won’t know the NZ Government’s decision until April 2019 and how the new CGT is to be structured is still up in the air, it’s probably helpful to know what has been proposed by the TWG.  The full TWG report can be viewed here<https://taxworkinggroup.govt.nz/resources/future-tax-final-report> for those who are interested in. Here is a brief summary of the CGT proposal for your reference:

  1. The capital gains tax proposed by the TWG would apply when an asset is disposed of (or when there is a change of use that takes the asset in or out of the capital gains net).
  2. The proposed capital gains tax covers:
    • shares
    • land (including commercial property, farms, rental properties, family baches, land owned overseas by NZ residents – but excluding the family home)
    • intangible property (e.g. goodwill, intellectual property, software and insurance policies)
    • business assets.
  3. The following assets are specifically excluded from the scope of the CGT:
    • the family home (the “excluded home”); Note that a person can generally have only one excluded family home.
    • shares in foreign companies that are already subject to FDR or are taxed under the FIF or CFC rules; and
    • personal use assets (jewellery, fine art, personal insurance policies).
  4. Where a person uses part of their home for income-earning purposes (e.g. has a home office, had flatmates or boarders, or uses part of the house for Airbnb income), two options are proposed by the TWG:
    • If less than 50% of the home is used for income-earning purposes, treat the entire property as the excluded family home (although no deductions will be available for correlated property-holding costs such as rates and interest, and income will still have to be returned);
    • Apportion the capital gain between income-earning use and personal use (with CGT applying to the income-earning portion). In determining the use, both floor area and time spent on income-earning purposes will be taken into account.
  5. Capital gains will be taxed at a person’s marginal tax rate. It should also be included in provisional tax calculations in the same way as other income.
  6. The rules for taxing capital gains would apply to gains and losses that arise after the implementation date (or “Valuation Day”, say, 1 April 2021). This approach requires taxpayers with existing assets to determine the value of the asset as of Valuation Day and calculate the increase or decrease in value from Valuation Day when the asset is sold or disposed of.
  7. The capital gains is taxable when the asset is sold or otherwise disposed of. Expenditure incurred in acquiring the asset will be deductible at the time of sale. Other capital expenditure (such as making improvements after acquisition) are also deductible at the time of sale. Holding costs (interest, rates, insurance, repairs and maintenance expenditure) are deductible in the year they are incurred.  Losses arising should be able to be offset against taxable income, but the TWG recognises that there is a revenue risk involved with this. Ring-fencing losses is therefore recommended as a possible option to mitigate this risk.
  8. All New Zealand resident individuals and entities would be caught by the CGT rules, including companies, trusts, partnerships and look-through companies.
  9. The TWG has recommended that rollover relief be included in the design of the CGT rules, essentially deferring the taxation of the capital gain until there is a later disposal. (For example, if land is transferred under a will, CGT would be deferred to such time as when the land is subsequently sold). The proposed rollover events include death, gifts (e.g. to charity), small business assets, involuntary events, Maori collectively-owned assets, business restructure, business sold at retirement, etc.

(Acknowledgement: Information extracted from CCH IntelliConnect Tracker.)

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