Capital Gains Tax: Why we’re not worried…

25 March 2019

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All of New Zealand is talking about CGT: Capital Gains Tax

There hasn’t been this much chatter about tax since the introduction of the Goods and Services Tax in 1986. The talk now is just as fevered as it was then.

Much of the discussion surrounds what will happen if a CGT does come in. This might include:

  • A tax on profits from the sale of land, shares, investment property, baches, businesses and intellectual property. Plus, almost any other assets that could appreciate in value and don't fall under the existing tax net. (The Government has ruled out taxing profits from the sale of the "family home" and the land it sits on. This depends on their definition of a “family home” of course.)
  • Profits could be taxed through the existing income tax system. That means capital gains might be taxed at the personal income tax rate i.e. up to 33%.
  • Tax would probably be paid when something is sold for a profit. However, the Tax Working Group has suggested tax might be collected each year on the likely "paper profits" people may have made from capital gains.

That brief summary is enough to indicate that big changes are in store if a CGT is introduced. As far as we’re concerned, that’s a very big IF. Actually, we don’t think it will come in at all!

The CGT is designed to target the property market. But that market is close to fixed as prices are not increasing like they were. The CGT could also target investors, but many no longer have tax breaks from properties through loss ring-fencing and bright-line rules. That said, if it does come in, property strategies will change. For example, instead of investing in two properties for your retirement, invest in three and use the third to pay the CGT.

The CGT has the potential to be more problematic for small business owners. Reduced availability of capital to fund business growth could be an issue. As could a 'valuation day', where assets are valued, and gains are calculated as occurring from that date. These are just two red flags we see in the report. Australia has CGT exemptions for small business, and we’d need to follow suit.

For all that, we’re not doing anything about a Capital Gains Tax just yet. We’re certainly not worried. Until all the detail comes out, and we see the Government’s full response in April, we’d just be guessing. When we hear something official, you’ll be the first to know.

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