The Government likely to enforce in 2021
The Tax Working Group headed by Sir Michal Cullen has recommended to the Government introduction of Capital Gains Tax.
The Official Report is due to be released to the public on February 21, 2019 and the Government may consider introducing the Tax with effect from April 1, 2021.
It is expected that the Tax Scheme will be broad-based with very little and or no exemptions, excluding Family Home.
The GST Example
Sir Michael was behind the introduction of the Goods & Services Tax (GST) in New Zealand.
The GST Scheme is a broad-based tax regime with very little exemptions, with almost everything attracting GST, making it unique in the world.
New Zealand is the only country with a wide-ranging consumption tax, including essential items. GST collects significant revenue for the Government.
It is expected that the Capital Gains Tax will be very similar to GST.
It will be applicable to all sorts of capital items such as Shares, Retirements Funds, Business Assets, Personal Property and Real Estate, New Zealand’s most loved asset.
The introduction of Capital Gains Tax has been in discussion for several years.
It may include Land, including Buildings, Residential Rentals, Commercial, Agricultural and Industrial Properties, Business Assets, Depreciable Properties, Intangible Intellectual Property and Goodwill, Interests from Equity-Shares, Portfolio Investment Entities (PIE), KiwiSaver, Holiday Homes and Vacant Land, Controlled Foreign Corporations (CFC) and Foreign Investments Funds (FIF).
The greater details of above will be announced in due course.
It seems that CFC, FIF, KiwiSaver, PIE, and definition of Family Home will require additional work and policy explanation by the Tax Working Group since these are complex areas.
The Transition Process
It is expected that the existing assets will be valued on the day Capital Gains Tax comes into effect. That valuation will be used to determine the amount of tax at the time of realisation.
The Tax amount would be the Realisation Price, namely Acquisition Price + Capitalised Costs.
The Rate of Taxation
The rate of tax is likely to be based on the Marginal Rate.
If you are earning $70,000+ a year, Capital Gains Tax will be at 33%.
Companies will be taxed at 28%.
It means that if someone bought a property in Auckland for $200,000 and it is realised at $800.000, then, gains of $600,000 will be taxed at 33% ($198,000).
It is likely that people may not sell the property to defer the tax bill.
We already have Bright Line Tax, but Capital Gains Tax will be comprehensive.
It also means that if you start a business from scratch and later sell it for $ 1 million, you will pay tax on the realised value.
The Capital Gains Tax will undoubtedly attract public attention as it would incur the wrath of the National Party, the main Opposition Party in Parliament.
Just how the proposal would affect the General Election due to be held in 2020 is too early to say but it would evince substantial public interest.
Saurav Wadhwa is a Chartered Accountant by qualification. He is the Principal Accountant at IBBZ Accounting Limited, Chartered Accountant & Tax Specialist, located in Botany, East Auckland.