Farreaching effects for all taxpayers

THE largest proposed shakeup in New Zealand tax law for at least 30 years will have farreaching effects for every taxpayer in the country.

At stake is billions of dollars a year in new taxtake for every successive government.

In what should be an initial relief for taxpayers, the majority of proposed changes happen when the asset is sold, meaning they do not have to find annual payments as their rental property, business, crib, farm or land appreciates in value.

The proposed capital gains taxes (CGT) under the Labour coalition Government would require taxes be paid on domestic shares when eventually sold, but there are concerns that might prompt savvy investors to headk offshore with their cash.

The Working Tax Group, headed up by Sir Michael Cullen, released its longawaited recommendations yesterday.

While sweeping, complex and contentious, the working group was essentially looking to reduce overinvestment in housing, while increasing tax ‘‘fairness’’, between those on lower incomes and those in the higher tax brackets.

Dunedin tax specialists from Crowe Horwath and Deloitte see several points of ‘‘unfairness’’, with myriad ramifications for several sectors.

While CGT excludes the family home and land, it encompasses rental properties and land, businesses, plus ‘‘intangibles’’, such as intellectual property and a businesses goodwill.

CGT would not be retrospective and asset owners would have five years from ‘‘valuation day’’ on April 1, 2021, to determine a value; unless sold earlier.

Crowe Horwath tax specialist Scott Mason, who attended the ‘‘lockin’’ of the report release in Wellington yesterday, said afterwards the working group’s mandate was carefully limited to exclude certain aspects, inheritance tax and a CGT on the main home.

‘‘We move from only those in the business of selling these types of assets, or speculators, being caught, to all taxpayers being caught,’’ he said.

He was most concerned with the application of CGT to farms, and also CGT applied to income from shares.

For farms, the recommendation is a spouse only can inherit the farm without CGT, but will attract the tax if they sell in the future.

Mr Mason said the working group had left it to the Government to allow inheritance to

❛ We move from only those in the business

of selling these types of

assets, or speculators, being caught, to

all taxpayers being caught Crowe Horwath tax specialist Scott Mason

include children and grandchildren in the future because it ‘‘did not know where to draw the line’’.

Deloitte partner and tax specialist Peter Truman in Dunedin said for a government looking for tax ‘‘fairness’’, several aspects appeared unfair.

On farm inheritance, Mr Truman said if the owner gifted it before death, it would attract CGT, but most would therefore switch to putting that gift into their will.

‘‘This all flies in the face of regular succession planning . . . and it’s going to add to compliance costs,’’ he said in an interview.

He noted that from a country without a CGT, New Zealand would now leap to having one of the highest rates in the 34member Organisation for Economic Cooperation and Development (OECD) — at 33% for most.

Mr Mason said it was a ‘‘major concession’’ that small businesses, with turnover below $5 million, would not attract CGT if they reinvested in a similar business within a year.

Business reorganisations and small business reinvestment would also have CGT deferred, until the business was sold.

Mr Truman, who in 30 years had not seen such sweeping proposals, noted the effect they could have on business decisions.

If a tradesman and spouse owned a $500,000 home and also a $500,000 commercial building for the business, they would attract CGT on sale of the building, but not the family home.

‘‘Why wouldn’t they just buy a $1 million home instead and lease premises,’’ he said.

On CGT on foreign shares and, eventually, domestic shares, both Mr Mason and Mr Truman were concerned a capital exodus from New Zealand could be sparked.

Mr Mason said income from foreign shares would still attract the existing ‘‘accruals’’ where gains are taxed on an annual basis, but domestic shares would attract CGT when sold.

The ‘‘key aspect of note’’ was that the net income derived is taxed at the taxpayers’ marginal tax rate, up to 33%, as opposed to a lower, special CGT rate, like 15%.

There would be a tax deduction allowed for the costs, of the asset being sold.

‘‘There are two main drivers here; perceived fairness of the current tax system in terms of the divide between low and upper wealth groups and the mismatch of tax rules across income and asset classes,’’ Mr Mason said.

‘‘The working group’s main proposal is a recasting, or extending, of the definition of income under the main income tax legislation.

‘‘That income includes the sales proceeds from the sale of practically every main asset class, except the family home,’’ Mr Mason said.

Both Mr Mason and Mr Truman noted government options now included how to stage the timing of introduction, whether to phase in asset classes over time or ‘‘grandparent’’ some asset classes; keeping them separate from changes.