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Tax Working Group Final Report – Worst Kept Secrets Confirmed

Tax Working Group Final Report – Worst Kept Secrets Confirmed

The Tax Working Group has released its final report of recommendations to the government. Most of the recommendations had been predicted in the interim report released in September, with the balance having been discussed in the media by members of the Working Group.

Key Proposals

The key proposals outlined in the report include:

  • A broad-based capital gains tax, excluding the family home and personal assets
  • Gains taxed at marginal tax rates and no inflation allowance
  • Gains taxed from 1 April 2021
  • Some tax relief for lower income earners

Who is Affected?

Everyone who has an asset that isn’t their personal home or a personal asset (boat, car, art, et cetera). The groups impacted by the recommendations of the Tax Working Group include:

Business Owners

Business owners will be impacted when it comes time to sell their business. Apart from the obvious tax obligation, being tax on the proceeds less business value at 1 April 2021, key issues include:

  • Valuation of the business on 1 April 2021 – there are a number of options proposed
  • Maintenance of excellent records over the entire lifetime of a business (for valuation)
  • Limited rollover relief (small businesses, defined as turnover of less than $5 million per annum have some relief)
  • Complexity where the family home is used for business purposes

Farmers

The impact on farmers will be similar to business owners above, with the added impact of the farm land being subject to capital gains tax. Apart from this, other impacts may include:

  • Limited rollover relief making farm size trading up difficult (farmers often grow their business by ‘trading up’ to larger farms)
  • Farms are long-term multi-generational businesses and planning has been based on the tax rules that have been in place for years
  • Potential tax when passed to the next generation

Landlords (Residential and Commercial)

Residential landlords have accepted lower yields in the expectations of a tax-free capital gain on exit. Renters may feel the squeeze as landlords run the ruler over their overall profit.

For landlords, this may be the last straw having already faced proposals to toughen up the Residential Tenancies Act and the planned introduction of residential rental loss ring fencing from the 2020 year.

Counteracting the disadvantages is the potential reintroduction of depreciation on buildings.

Succession Planners and Procrastinators

In some respects, this will be the group potentially worst impacted by the recommendations of the Tax Working Group. This is because capital gains tax events may be inadvertently be triggered when engaging in restructuring. Tax rules around restructurings are already complex including debt forgiveness rules and shareholder continuity rules for losses and imputation credits. In the absence of robust rollover relief for estates, trusts will become even more attractive.

Lower rates of tax on the first $500,000 are proposed where a business is being sold because the owner is retiring.

Bach Owners

The only residential property to be exempt from a capital gains tax will be the family home. This excludes the family bach, with the result that any capital gain arising after 1 April 2021 on the family bach will be subject to tax.

Low Income Earners

The key sweeteners focus on low income earners, and are:

  • Extension of the lowest tax bracket
  • Reduction of PIE rates for KiwiSaver funds by 5% on the lowest two brackets (to 5.5% and 12.5%)
  • Increasing the KiwiSaver member tax credit to 75 cents for every dollar saved up to the current contribution cap
  • Refund of employer superannuation contribution tax for KiwiSavers earning less than $48,000 per annum

Next Steps

The recommendations of the Tax Working Group will not necessarily form the basis of any legislative proposals. The current government consists of three parties with varying policy objectives and ultimately there will be compromise in the final set of legislative proposals.

Any capital gains tax will not come into force until after the next election, with 1 April 2021 being the most likely date. Getting your affairs ready for the new reality can take many months and professional advisors such as accountants and lawyers will be busy aiding their clients. Accordingly, it is better to get in touch sooner rather than later.

Now is a perfect opportunity to consider your broader goals and objectives and to review the structures and investments you currently have in place to see if any changes are warranted. This may go beyond consideration of capital gains taxes and can include the usual suite of items including succession planning, exit strategies and return maximisation. Your advisor should be able to help you with this process.

Our View

This is an extremely broad and wide-ranging proposal that captures all capital gains, with few exemptions.

Ultimately the devil will be in the detail and this is yet to be released. If the recommendations of the report proceed, we will end up with an unwieldy, poorly designed, complex approach to taxing capital gains.

We have many concerns with the proposal as it stands. Assets subject to capital gains tax may be held for many years, and even at a couple of percent, inflation accumulates over time. In instances where a capital gain only represents compensation for inflation, a taxpayer will be obliged to pay a capital gains tax even though their overall real wealth has not changed. We consider this inherently unfair.

Our trading partners’ lower rates compensate for the lack of an inflation adjustment in those countries. If New Zealand has full tax rates and no inflation adjustment that is manifestly unfair and out of step with our traditional trading partners.

Rollover relief appears to be limited to some instances on death, business restructures where there is no change of ownership, involuntary events and small businesses. This can make it difficult to grow a business through the sale of an asset and replacement with an equivalent asset.

Because the proposals are so wide-ranging this may be a strategy to present the worst case now, and, therefore make people more welcoming to a ‘reasonable’ regime when it is finalised.

Our trading partners have an effective lower rate of capital gains, as shown in the table below:

AustraliaUp to 23.5%
United StatesUp to 28%
United KingdomUp to 28%

Conclusion

The next eighteen months will see much debate on the shape of a capital gains tax with the 2020 election likely being fought over it if the government decides to proceed. This would represent the biggest change in the tax landscape since the introduction of GST in 1986. We will keep you informed every step of the way.

TO PRINT

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