Capital gains tax – ready or not here I come…maybe
Depending on the election outcome, after 20 September 2014 New Zealand may join other developed countries and introduce a ‘capital gains tax’ (CGT). CGT is on the agenda of several political parties. Where the general left/right divide sees National, ACT, the Conservatives and United Future against introducing a CGT, the other side sees Labour, the Green Party, and Mana-Internet actively campaigning for it. The positions of NZ First and the Maori Party are less clear.
If National wins the election the status quo is likely to remain. If Labour and/or the Green Party win, then the introduction of a CGT is likely.
The rationale for CGT
New Zealand’s tax system is designed to be “broad-base, low-rate”. The aim with such a system is to have lower tax rates applying across a broader range of transactions so that tax isn’t a factor when weighing investment decisions. For advocates of CGT, the absence of taxing capital gains creates a gap in our broad-base system.
Technically New Zealand already taxes some capital gains, but only in narrowly defined circumstances. Introducing a broader based CGT will have a broader impact than the current rules, particularly in respect of land, as more property transactions will be subject to tax and this could promote investment away from the property market and into the productive sector. Once the tax bias towards investment property is removed, the housing market may stabilise.
The introduction of CGT also provides additional tax revenue (estimated at $25 million in year one) that parties such as Labour are relying on to support other policy initiatives.
Likely application of CGT
Given Labour’s CGT policy is the most likely form if introduced, a summary has been provided below based on announcements made up to the time of writing.
Gains subject to CGT will be taxed at a flat rate of 15%. CGT would apply to rental properties, shares, commercial properties, farms (excluding owner-occupied farm houses), holiday homes, businesses and fine metals and minerals.
Certain exclusions will exist for the family home, items of personal property, cars, jewellery, art and antiques. An exemption for the sale of small businesses by persons over the age of 55 has also been proposed, along with various deferrals for death and relationship break-ups until the recipient sells the property.
Based on Labour’s 2011 policy, implementation of CGT is likely to be on a “valuation day” approach. This will see assets that are going to be subject to CGT valued on implementation and any future increases above that value will be caught.
It is reasonable to expect that if the Labour / Green parties win the 2014 General Election a CGT regime will be implemented, with a likely introduction from 1 April 2016.