Glynis kindly sent through some her important info from her talk this week. this will make way more sense than my So make sure you read more for all the goss........
Capital gains tax

Final report TWG 21 Feb 2019

The TWG released its final report on 21 February 2019. The report proposes extending the existing coverage of taxing capital gains. Eight of the 11 members of the TWG favour a broad capital gains tax that will apply at full income tax rates on realisation (sale or other disposal) of an asset and with no allowance for inflation. This is projected to raise $8.3 billion over five years, with revenue increasing over time.

Scope of the capital gains tax

The proposed capital gains tax (CGT) covers:
  • ▪ shares
  • ▪ land (including commercial property, farms, rental properties, family baches, land owned overseas by New Zealand residents — but excluding the family home)
  • ▪ intangible property (eg goodwill, intellectual property, software and insurance policies)
  • ▪ business assets.
The following assets are specifically excluded from the scope of the CGT:
  • ▪ the family home (the “excluded home”)
  • ▪ shares in foreign companies that are already subject to FDR or are taxed under the FIF or CFC rules, and
  • ▪ personal-use assets (jewellery, fine art, personal insurance policies, boats and cars).

What is an excluded home?

An “excluded home” for the purposes of the CGT rules will be 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. The definition draws from that used in s 72(3) of the Electoral Act 1993.
A person, or a family unit, can generally have only one excluded family home. There is no upper limit on the value of an excluded home. The so-called “mansion effect”, where people invest more capital in their main home where it can generate untaxed capital gains, is noted but not addressed in the report.

Home used for income-earning purposes

Where a person uses part of their home for income-earning purposes (eg has a home office, had flatmates or boarders, or uses part of the house for Airbnb income), two options are proposed by the TWG:
  • ▪ If less than 50% of the home is used for income-earning purposes, treat the entire property as the excluded family home (although no deductions will be available for correlated property-holding costs such as rates and interest, and income will still have to be returned).
  • ▪ Apportion the capital gain between income-earning use and personal use (with CGT applying to the income-earning portion).
In determining the use, both floor area and time spent on income-earning purposes will be taken into account.

Capital gains tax rate

Capital gains will be taxed at a person’s marginal tax rate.

Valuation Day

The rules for taxing more capital gains would apply to gains and losses that arise after the implementation date (“Valuation Day”). This approach requires taxpayers with existing assets to:
  • ▪ determine the value of the asset as of Valuation Day, and
  • ▪ calculate the increase or decrease in value from Valuation Day when the asset is sold or disposed of.
The tax working group recommends that taxpayer have five years from Valuation Day (or to the time of sale if that is earlier) to determine a value for their included assets as at Valuation Day
The report recommends that Inland Revenue provide a number of valuation options, depending on the asset. For land, this could include Quotable Value valuations or ratings valuations, as well as other valuation methods outlined in the report. The TWG also recommends a “median rule” should apply to calculate the capital gain (or loss), the purpose of which is to smooth capital gains and prevent taxpayers from being subject to tax on artificial paper gains or losses.
If no valuation is determined, then a default rule should apply

How to calculate the CGT

The capital gains is taxable when the asset is sold or otherwise disposed of. Expenditure incurred in acquiring the asset will be deductible at the time of sale. Other capital expenditure (such as making improvements after acquisition) is also deductible at the time of sale. Holding costs (interest, rates, insurance, repairs and maintenance expenditure) are deductible in the year they are incurred.
Losses arising should be able to be offset against taxable income, but the TWG recognises that there is a revenue risk involved with this. Ring-fencing losses is therefore recommended as a possible option to mitigate this risk.
Capital gains should be included in provisional tax calculations in the same way as other income.

Entities affected

All New Zealand resident individuals and entities would be caught by the CGT rules, including companies, trusts, partnerships and look-through companies. (The qualifying company regime would have to be repealed, but transitional rules put in place to allow QCs to pass out all capital gains derived prior to the CGT rules being introduced).
Trusts distributions and trust settlements, being essentially gifts, could be caught by the new CGTrules and liable to tax if specific carve-outs are not made for trusts.

Rollover Relief

The TWG recommends rollover treatment for certain life events (such as death and relationship separations) , business reorganisations and small business reinvestment.
The general rule is that the capital gains tax would be imposed when an asset is disposed of (or when there is a change of use that takes the asset in or out of the capital gains net). The TWG has recommended that rollover relief be included in the design of the CGT rules, essentially deferring the taxation of the capital gain until there is a later disposal. (For example, if land is transferred under a will, CGT would be deferred to such time as when the land is subsequently sold). The preferred view of the TWG is that:
  • ▪ rollover relief should apply to all transfers of assets on death
  • ▪ no rollover treatment should apply to gifting while the person is still alive (other than for gifts to the person’s marriage, civil union or de facto partner)
  • ▪ rollover relief should be provided for business restructures that result in a disposal of assets but no change in ownership in substance
  • ▪ rollover relief should apply for involuntary events such as where an asset is destroyed by a natural disaster (or event outside the owner’s control) and insurance proceeds are received, or by compulsory acquisition of land by the Crown
  • ▪ a special rollover concession be available for small businesses that sell business assets and reinvest the proceeds in replacement business assets
  • ▪ a one-off concession be designed that extends lower tax rates to the first $500,000 of capital gains made by business owners selling a closely held active business once they reach retirement age
  • ▪ there will be specific measures to deal with Māori collectively-owned assets, and
  • ▪ gifts to donee organisations (typically charities) should be ignored for tax purposes (ie no tax payable on the capital gain, but no donation tax credit provided).