Capital gains tax: What we don’t yet know

Michael Cullen

The Tax Working Group (TWG) will publish their report next week. It will recommend the implementation of a Capital Gains Tax (CGT). What we don’t yet know is exactly how this tax is to be implemented. Michael Cullen will squeeze every cent out of it that he can and the results will be very damaging for those that already pay the most tax. quote.

Since it published its interim report, [the TWG] it has decided people should be taxed on assets they already owned, but only on the gains that they make after April 2021 ? the so-called “valuation day” approach. 
That means if people bought shares in a company or an investment property in 2015 and then sold them in 2025, they would pay tax on any increase in value from April 1, 2021.   end quote.

This is fine for shares in listed companies but not so fine for a property, unless you are happy to go with the CV that applies at the time, and it’s completely impossible for businesses. Michael Cullen can play this down all he likes, but there will be some serious inequities if all businesses are not valued on or around ‘valuation day’. Michael Cullen might be prepared to accept a reasonable estimate, but the IRD will not. quote.

TWG member and PwC tax expert Geof? Nightingale says the major reason for that is that if it took the alternative “grandparenting” approach, then it would take years for a capital gains tax to bring in much revenue.
Grandparenting would provide a big incentive for people to hang on to the likes of houses and shares that they owned before the change took effect, for no good reason other than to minimise tax. end quote.

CGT is a good incentive for people to hang on to houses and shares. As this tax is being signalled a long way out, people will take the opportunity to structure their portfolios so that sales will not be made for some years after the introduction of the tax. quote.

A policy choice on which the TWG appears to have made progress is over “rollover relief”.
Rollover relief let investors defer paying tax on capital gains when they reinvest profits.
Cullen says the TWG will recommend such relief be “narrow”, though Nightingale says the TWG has “reluctantly accepted” rollover relief would apply on death ? so, for example, an investment property could be passed on to a family member without triggering a tax bill on inheritance. end quote.

But sell the property, as most people do in that situation, and the tax must be paid. This merely postpones the tax collection date. quote.

Nightingale says that in theory capital losses should not be ring-fenced ? so if investors make a loss they should be able to offset that against a capital gain on which they would otherwise pay tax.
But the more Inland Revenue allowed rollover relief, the more it would need to ring-fence capital losses to “protect the integrity of the system”.
end quote.

Stuff

The US system allows capital losses to be carried forward and offset against future capital gains. It would be completely inequitable for this not to be done here. This rule was not applied, however, in the taxation of overseas assets, so it may not happen to capital gains either. Watch this space.

Taxpayers will pay CGT at their marginal rates. Think about this though. Let’s say you are a superannuitant with a rental property, but no other significant income. You sell the property and make a profit of $100,000. Your normal marginal tax rate would be 17.5%, but because the capital gain has increased your income for that year, you will be paying tax at the top rate of 33%. Not only that, but IRD may even assess you as being liable for provisional tax too. That depends on the remit to IRD, but the TWG is not concerned with such piffling details.

All sounds extremely fair and equitable, don’t you think?

The proposed CGT is giving this gentleman a headache.
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