The Tax Working Group (TWG) Final Report is out, and it has everyone aflutter. After years of debate about whether a capital gains tax (CGT) should be introduced or not, the TWG have clearly recommended that introduction of a CGT is the way to go.
The recommendations are broad and far reaching. If implemented in its proposed form, it would be a tough an uncompromising tax. Very few exclusions are recommended. The “main home” exemption has been given the thumbs up. If the TWG had not included this common exemption New Zealand would have been an outlier and probably the only jurisdiction to tax the main home (without some threshold) in the world. Given that CGT is touted as leveling the playing field, a tax on everyone’s home would be unfair.
According to the TWG a main home is defined as “the place that a person owns, where they choose to make their home by reason of family or personal relations or for other domestic or personal reasons.”
So, when is a home a “main home”? In this day and age of long commutes, contract work across borders and blended families, it is not always easy to determine when a home is a main home. Parliamentarians commute between their home constituencies and Wellington. Where is home when you split so much of your time between two places? What if your family spends half the year in different places?
How will this affect those with a rental property?
For as long as most of us can remember when you hold property as a long-term investment, the proceeds you receive on the eventual sale will not be subject to tax. This gain was the sacred cow of previous generations.
Under the proposed CGT any gain made on the sale of the rental property, irrespective of how long you have held it – even if held for longer than the time periods set out under the newly introduced “bright-line test” – will be taxable. This is because it is not your main home.
Anyone who has a retirement strategy which involves buying rental properties and living off the rental income, and selling when it all gets a bit hard, or if the market is booming, will have to prepare to pay a whack of cash over to Inland Revenue. Retirement planning just got a little harder.
Surely Government would want taxpayers to be self -sustaining, especially when there are concerns from the Retirement Commissioner about the ability of future generations to fund superannuation? It appears that Government is more worried about the fact that there is a perceived unfairness and landlords should be disincentivised from holding rental properties.
So, what to do? Essentially, unless you were speculating, you may want to stick to your plan. CGT is only payable on disposal. If you don’t sell, you don’t pay tax.
Shares – the TWG recommends CGT be payable on domestic shares. This recommendation has some investment experts reeling. When our stock exchange is not supported that well currently, this may well suffocate the market. Investing in foreign shares could prove a better bet under the current FDR method (taxed at a flat 5% FDR rate).
Other excluded assets
Your main home and foreign shares are recommended as excluded assets. The TWG also recommends cars, boats, art and other personal effects be excluded.
This is, however, just the start of the discussion on CGT. The recommendations will need to be designed and finessed into legislation. The TWG have explicitly indicated that the full legislative process must be followed, and this includes consultation with the general public and tax professionals. Government have indicated that they will set out their response in April. That will make interesting reading. The tax team at Bellingham Wallace will participate this this process, so watch this space.
By Graham Lawrence (Director) and Carla Cross (Senior Tax Manager)
