The New Zealand government-appointed Tax Working Group ("TWG") has recently released its Interim Report on the “Future of Tax” following a nine-month “national conversation” with a wide range of taxpayers and interest groups.
The TWG was established by the government after the 2017 election with a mandate to examine the “structure, fairness and balance of the tax system” and consider whether any changes could be made to improve New Zealand’s tax settings.
Unsurprisingly, the “national conversation” since the TWG’s establishment has focused on the contentious issue of capital gains taxation. As it stands, there is no general capital gains tax in New Zealand and tax is only imposed on certain gains on particular assets.
The TWG has not yet finalized its view on “extending the taxation of capital income” (which for simplicity’s sake we refer to as capital gains taxation), but the Interim Report includes a lot of detail on what a capital gains tax could look like in New Zealand.
This detail, summarized below, will be of interest to all taxpayers who hold capital assets and to anyone considering investing in capital assets in New Zealand.
Potential Design of a Capital Gains Tax
In the Interim Report the TWG narrows in on what a tax on capital would look like in New Zealand. In particular, land and wealth taxes have been rejected and the TWG is now focusing on two options: a broad-based realization-based tax on capital gains; and a broad-based tax on capital on a deemed return basis.
Although the Interim Report explores both options, a realization-based tax is far more likely given that accrual taxation on a deemed return basis would require regular revaluations and would have significant cash-flow implications for taxpayers.
The Interim Report goes through some key design aspects of a realization-based capital gains tax, which we explain below.
Scope of the Tax
The TWG suggests that the capital gains tax should apply to land (excluding the family home), shares and other equity interests, intangible property including goodwill, certain choses in action (such as trade tie agreements), and other revenue-generating assets that are not currently taxed. Importantly, the capital gains tax would not apply to all assets or all disposals.
In addition to the family home exclusion, it is likely that certain personal assets such as a fine art and jewelry would be excluded, and that rollover relief would apply in certain cases e.g. for inheritances and intra‑group transactions.
No Preferential Rate
The TWG suggests that there would be no preferential tax rate for capital gains. Instead, capital gains that are taxed under the new rules would simply be taxed as income at the applicable marginal rate (which currently range from 10.5 percent to 33 percent).
The TWG has considered whether capital assets acquired before the effective date of the new rules should be subject to capital gains tax. The TWG’s preference is to impose capital gains tax on these assets, but only on gains accruing on them after the effective date of the new rules. This would be achieved by treating such assets as having a cost base equal to their value on the effective date of the new rules. The valuation of existing asset holdings will be a key issue to work through for taxpayers in practice, and is likely to be complicated and time consuming.
Revenue Raising Tax Grab, or Revenue Neutral Shift?
Since the release of the Interim Report, Hon. Grant Robertson, Minister of Finance, has encouraged the TWG to recommend an overall package of tax measures that “could result in a revenue-neutral package” — in essence, a shift in the burden of taxation as opposed to a tax “grab.”
It will be interesting to see where the TWG gets to on this point, given it has expressed reluctance towards lowering the top personal tax rate and recommended against lowering GST and the company tax rate.
We suspect the TWG may recommend tax cuts targeted at low to middle income earners, which the TWG is already recommending in the context of retirement savings.
Importantly, the TWG has stressed that it will only recommend a capital gains tax if the “fairness, integrity, revenue, and efficiency benefits” of a CGT will outweigh the “administrative complexity, compliance costs, and efficiency costs” of any such tax.
Former Finance Minister Sir Michael Cullen (who chairs the TWG) has been quoted as saying that capital gains taxation is not a “no brainer,” and there is clearly still work to do in analyzing the trade-offs before the TWG releases its final report, which is due in February 2019.
If the TWG recommends a capital gains tax, we expect that the coalition government will seek to enact capital gains tax legislation to take effect after the 2020 general election. It remains to be seen whether the government will enact the TWG’s recommendations in full, or whether it will water down aspects to make the tax more palatable to the voting electorate.
Importantly, opposition finance spokesperson Amy Adams has already said that a capital gains tax makes “no sense,” so capital gains taxation is shaping up to be a key election issue in 2020. TWG recommendations aside, the real decision makers on a capital gains tax for New Zealand will be the New Zealand public.
As explained above, the introduction of a capital gains tax and the form of that tax is not yet decided, but in our view there is a very real prospect that New Zealand will have a capital gains tax after the next election in 2020.
Given that no grandfathering is currently proposed, anyone currently holding capital assets or considering investing in New Zealand in the near future should factor the risk of capital gains taxation into their plans.
Anyone who may be affected by capital gains taxation should keep a close eye on developments over the next few months. There is still time to make submissions to the TWG, and those interested should consider adding to the conversation if they have not already submitted.
Simon Akozu is a Senior Associate and Charlotte Agnew-Harington is a Solicitor at MinterEllisonRuddWatts, New Zealand.