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Capital Gains Tax and the Tax Working Group – what’s really happening?

The Tax Working Group (TWG) is an independent group of experts the Coalition Government asked to review New Zealand’s tax system. The TWG has now released their final report (read the full report here). They found that overall our tax system is clear and simple, but it’s unfair in some places. The TWG found there is room for improvement, and has made a number of recommendations to make the tax system fairer and more balanced.

The Coalition Government does not have to accept all the recommendations, and has not yet decided which recommendations will be accepted.

So, what now?

The Process

The Coalition Government is currently considering the TWG’s recommendations. Our aim is to ensure the system is fair for families and businesses, and that it offers balance across the wider economy.

We will work together with our Coalition and Confidence and Supply partners to take into consideration the report’s findings, and to find consensus on the best overall package for New Zealanders. We are not bound to accept any of the recommendations, and it is highly unlikely all recommendations will be implemented.

As the report states, the existing broad-based low-rate tax system is mostly clear and simple already, so our response will preserve the key principles of this system. We will seek technical advice on addressing the gaps identified by the TWG and make further announcements in April on any measures to enhance the fairness and integrity of the tax system.

There are some clear bottom lines which remain in place. In particular, the family home, increases to income tax and GST, and an inheritance tax are off limits. If we do go ahead with any changes, none will be implemented this term, so New Zealanders will have the chance to vote at the next election on any decisions made by the Government.

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Capital Gains Tax, Income Tax & KiwiSaver

A Capital Gains Tax is not currently Labour Party or Coalition Government policy. In fact, we’d like to hear your views on the future of our tax system.

A Capital Gains Tax taxes the gains made on assets when they are sold. For example, if a person buys an investment property for $500,000 and sells it for $750,000 six years later, the income made from the sale is currently untaxed.

Under the TWG’s proposal, the $250,000 gain would be taxed at the marginal tax rate.

New Zealand is one of only two countries in the OECD that does not currently have a Capital Gains Tax. Countries like the UK, US, Australia, Latin America and virtually all of Europe have a Capital Gains Tax, while notable tax havens such as Monaco and Cayman Islands do not.

The TWG has set out a recommendation to treat all types of income the same for tax purposes.

The TWG has recommended a Capital Gains Tax (CGT) on the profit made from the sale of land, shares, business assets, and intangible assets such as intellectual property. Under this recommendation, the tax would be imposed when the asset is sold, and levied at the seller's marginal tax rate.

The CGT would NOT apply to the family home, and personal assets such as cars, paintings, jewellery, and household appliances.

The TWG’s proposal is for tax to be paid at the point of sale and only gains made in the future would be taxed. Any gains accrued in the past will be tax free and protected.

The capital gain on shares in companies would be taxed but in some circumstances capital losses would also be able to be offset against future capital gains.

The capital gain on the sale of a business would be taxed, including the goodwill. For some businesses, the TWG is recommending that $500,000 of any gain would be taxed at a lower rate.

The TWG has recommended exemptions from capital gains to be granted for some "life events" such as a relationship breakup or a death. A family farm passed on to a family member would be covered by a rollover and there would be no tax on the capital gain. But if the family member then sells to a third party the capital gain would be taxed.

The TWG was asked to ensure our tax system is fit for purpose for today’s New Zealanders and for future generations. The Group recommended a CGT to make the system fairer and more balanced, and encourage investment in productive activities rather than sectors such as property.

It's estimated the CGT would cost less than 1% of the annual disposable income of the bottom 70% of households and the tax would only apply when assets are sold. The majority of the impact would be on the top 10% of households.

Any CGT will only take effect after the next election, which means the Capital Gains Tax meter would start running from 1 April, 2021. The gains on deals made before this date would be unaffected. An asset will need to be valued when the tax is imposed, and any capital gain will be measured from that value.

The TWG has recommended raising the bottom income tax threshold, which means everyone would be paying a lower tax rate on more income.

Depending on how much the thresholds were changed, households – especially those on a lower tax rate – could have between $200 and $1200 more per year, depending on their circumstances and which recommendations are taken up.

The report recommends that the Government take steps to encourage retirement saving for low and middle income groups. One recommendation is to refund the employer Super tax contribution to savers on an income of up to $48,000, and partially refund it for people earning above that.

Another is to offer lower KiwiSaver tax rates on Portfolio Investment Entities (PIE). Members would also get higher member tax credits for each dollar saved (a maximum of $781.50 per year, up from $521).

The TWG also proposed that people on parental leave get maximum tax credit even if they do not make the required minimum contribution in a year.

These changes have been recommended because any potential changes to the way domestic and foreign shares would be taxed might affect KiwiSaver fund investment returns. The net result would make the majority of KiwiSavers better off.

In our response to the TWG report, we will carefully consider their recommendations and listen to the public as we work through all of these issues with our Government partners.

We understand the importance your voice being heard when changes such as this are being considered. You can share your thoughts here:

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Top Questions

Our Coalition Government will take a measured response to this report. We will work together to take into consideration the report's findings, and to find consensus on the best overall package for New Zealanders. We are not bound to accept the recommendations put forward by the TWG. It is highly unlikely all recommendations will be implemented.

The independent report finds that overall our tax system is clear and simple but there is room for improvement. The TWG said there is some unfairness that could be addressed. We will work through ways to do this to make the system fairer and more balanced.

The Government is not bound to accept the recommendations the TWG put forward. There are options to accept some, and/or to phase or sequence aspects of the packages proposed by the Group. It is highly unlikely all recommendations will need to be implemented.

We will be discussing the recommendations with our Coalition and Confidence and Supply partners as we work to find consensus on the best overall package. Ministers expect to release the Government’s full response to the Report in April 2019 following detailed discussions with officials and consultation between Government parties.

There is no need for a major overhaul of the system. Our response will preserve the key principles of our existing broad-based low-rate tax system. However, we do want our tax system to be fair for everyone. We will seek technical advice on addressing the unfair and unbalanced elements identified by the TWG and make further announcements in April on any measures to enhance the fairness and integrity of the tax system. Our aim is to ensure the system is fair for families and businesses and that it offers balance across the wider economy.

If the Government does decide to make changes, no changes arising from the report will be implemented this term. This is as per the commitment we made when we established the TWG. No policy measures would come into force until 1 April 2021 – giving New Zealanders the chance to vote on any decisions made by the Government.

The Government has said that if we take up any of the proposals, any changes would not apply to the family home or the land beneath it. The independent tax working group then went away to consider how they would approach this. They suggested a 4,500m2 carve out rule, based on the existing rules for defining the family home, which were also in place under the previous Government. This means, for example, if you have a lifestyle block that’s 5,000m2, the house and land underneath it will be exempt up to 4,500m2 – so only 500m2 would be subject to a CGT, when the property is sold.

It’s important to remember that this is just a proposal, and no policy decisions have been made. In our response to the TWG report, the Government will carefully consider their proposals and listen to the public as we work through all of these issues, in a measured way with our Government partners.

The family home, increases to income tax and GST, and an inheritance tax have already been ruled out by the Government.

Tax reform initiatives separate to the work of the TWG will continue in the meantime – such as making sure multinationals that provide digital services pay their fair share. We will keep looking at ways our current tax system fails to address global economic and social forces which affect economic activity.

The report can be found at www.taxworkinggroup.govt.nz

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Your Views

It’s important to note that the independent Tax Working Group report only contains proposals – not policy decisions. The Coalition Government is working through the recommendations in a measured way, and we’d like to hear your views on the future of our tax system.

First, let us know if you support or oppose a Capital Gains Tax, then share your thoughts below.