Big IdeasTax Working Group Recommendations
18 March 2019The coalition government’s tax working group (TWG) has delivered its final report on the future of tax in NZ, including a recommendations on a capital gains tax and to use taxes to influence better environmental outcomes.
The report recommends that capital gains tax would apply to gains and losses after the sale of a residential property (including holiday homes), businesses, shares, all land and buildings but tax would not be applied to the family home, or the land it sits on. Cars, boats and art would also be exempt. The idea is that gains would be taxable on 'realisation', or when value has hit home for the owner (with proposed 'roll-over' relief where a realisation method is unfair). The tax will apply from the date of implementation (also referred to as 'valuation day'), which may be some time from now. It is acknowledged that valuing all assets on a particular date will have practical difficulties and may be expensive, so expect some options around this (e.g. timing, valuation method).
The government has a range of options for the implementation of CGT. These include the inclusion or exclusion of the various asset classes, the timing of changes, who the tax applies to, and the timing of the tax. Each option will come with its own costs and benefits and these will need to be considered carefully.
You should definitely consider the outcome of the possible changes but be very careful with any decisions derived from these. Whilst tax planning is important, we would recommend waiting until the changes are confirmed before taking any action - especially without advice!
The TWG has said that there is "significant scope for the tax system to play a greater role in sustaining and enhancing New Zealand's natural capital. The environmental challenges at play around the world are well documented and it is clear that change and leadership are necessary to address these. Taxes are certainly a lever worth considering among other measures to ensure better long term outcomes. The TWG has recommended better use of environmental taxes for the short term because these could be "a powerful tool for ensuring people and companies better understand and account for the impact of their actions on the ecosystems on which they depend". Short term priorities included a focus on waste disposal levy, improving the Emissions Trading Scheme and making use of congestion charges. It was noted that managing the transition to a sustainable economy is vital and that in the medium term the revenue from environmental taxes should be used to fund the transition.
In total there are 99 recommendations and, among other key points, the report recommends:
There will be no changes to income tax rates but that the threshold is raised to allow for low and middle income groups to earn more at a lower rate. The aim here being to make the tax system fairer.
The simplification and improvement of business taxes. For example, simplifying fringe benefit tax (FBT), simplifying (or even removing) the entertainment expenditure rules, increasing the provisional tax thresholds.
Changing the existing loss-continuity rules for innovative start-up businesses to better enable their ability to fund growth through additional equity capital (the TWG states that existing rules are suitable for established businesses, and correctly observed that the rules are a deterrent for start-ups due to the increased likelyhood of both incurring a loss and breaching the 51% shareholder continuity required to carry these forward to use against future profits).
Allowing a deduction for black hole expenditure (expenditure that is not recognised as a depreciable asset, or a deductible expense) to encourage innovation and investment into new assets, processes or business models. The TWG notes that extending CGT would support the case for allowing deductions for black hole expenditure and a broader range of deductions generally.
That the Government consider whether or not it wishes to remove the proposed loss ring-fencing on residential rental property if the taxation of capital gains is extended to include residential rental investment property.
The government will take some time to review the report and have indicated that an official response will be made in April 2019. Any new taxes would likely come into effect from April 2021, at the earliest, with the tax to be applied to gains and losses made after this date. We will be watching developments closely so we can advise you of the possible impacts.
In its final word the TWG encouraged "all New Zealanders to stay involved as the programme of tax reform is developed. Together, we can – and should – shape the future of tax". We agree and hope that you read the report and play your part in this national conversation.
To read the full report, click here.Back to Big Ideas