All eyes on Tax Working Group report

Business and political news this week is set to be dominated by the long-awaited Tax Working Group report on Thursday - and its recommendations around a capital gains tax (CGT).

Craigs Investment Partners broker Chris Timms said the Government was likely to offer "some initial thoughts'' before formally responding in April.

"The centrepiece of the final report is widely expected to be a capital gains tax, although the devil will be in the detail''.

Given New Zealanders' love affair with property, a capital gains tax proposal - in whatever form - will affect hundreds of thousands of people, and is likely to overshadow other proposals.

New proposals could include applying CGT to assets upon death, which could trigger tax on theoretical gains to date on, say, farms without any ability to fund the tax, unless "rollover relief'' was given to ignore the death.

Packages could be made sweeter for low-to-middle income levels, with possible tax cuts as the Government targets revenue-neutral outcomes.

Crowe Horwath managing partner and tax specialist Scott Mason said there was a good rationale for introducing CGT, especially as the bubble of baby-boomers moved from earning money to relying on earnings from their assets and the country struggles to fund infrastructure.

"There's a lot of wealth in New Zealand arising from property currently which is not taxed,'' Mr Mason said.

He thought that while the family home would be exempt, holiday homes would not, which raised the question of taxes on cribs which were not rented out.

"Holiday homes are a very private asset, and CGT would be making them taxable.

"What about luxury cars, or art collections?'' Mr Mason said of other asset classes with an appreciating value.

Taxes from shares would also be under scrutiny, be it "accruals'', where they were taxed annually, or "on disposal'', where taxes would be imposed at the point of sale, potentially after many years of being held.

The effects of taxes on shares probably needed to be aligned either on a disposal or accruals basis to avoid market arbitrage.

"There has to be a common approach for both international or domestic shares ... or fund managers could just move offshore'' if one share class was favoured over another, he said.

Another "contentious point'' might be roll-over relief at death, where a family inheriting a farm would not be required to pay CGT until the farm was sold later.

He noted an inheritance tax had been excluded from the terms of reference the Tax Working Group was working under, so they needed to be careful they could distinguish between that and a capital gains tax, with the key difference being CGT was only on gains.

Mr Mason was picking tax breaks for those under $48,000, but also the possibility of break for those earnings up to $70,000.

Craigs' Mr Timms said the intention was for any changes to be legislated before the end of the parliamentary term, but for the effective date of these to be no earlier than April 1, 2021.

"This would essentially give the country an opportunity to voice their opinion on any proposals at the next election,'' Mr Timms said.

Craigs head of wealth research Mark Lister said while not a sure thing, CGT was expected.

"Me and everyone else out there who has followed this in any shape or form will be incredibly surprised if a capital gains tax isn't there,'' Mr Lister said.

"For me, it's just about the detail about how it may be applied and the exemption,'' Mr Lister said. - Additional Reporting: BusinessDesk


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