A substantial tax benefit for migrant Kiwis living in Australia
It is a reality of the modern and mobile world we live in that many of our clients have adult children...
The Tax Working Group has released its final report of recommendations to the government. Most of the recommendations had been predicted in the interim report released in September, with the balance having been discussed in the media by members of the Working Group.
The key proposals outlined in the report include:
WHO IS AFFECTED?
Everyone who has an asset that isn’t their personal home or a personal asset (boat, car, art, et cetera). The groups impacted by the recommendations of the Tax Working Group include:
Business owners will be impacted when it comes time to sell their business. Apart from the obvious tax obligation, being tax on the proceeds less business value at 1 April 2021, key issues include:
The impact on farmers will be similar to business owners above, with the added impact of the farm land being subject to capital gains tax. Apart from this, other impacts may include:
Landlords (Residential and Commercial)
Residential landlords have accepted lower yields in the expectations of a tax-free capital gain on exit. Renters may feel the squeeze as landlords run the ruler over their overall profit.
For landlords, this may be the last straw having already faced proposals to toughen up the Residential Tenancies Act and the planned introduction of residential rental loss ring fencing from the 2020 year.
Counteracting the disadvantages is the potential reintroduction of depreciation on buildings.
Succession Planners and Procrastinators
In some respects, this will be the group potentially worst impacted by the recommendations of the Tax Working Group. This is because capital gains tax events may be inadvertently be triggered when engaging in restructuring. Tax rules around restructurings are already complex including debt forgiveness rules and shareholder continuity rules for losses and imputation credits. In the absence of robust rollover relief for estates, trusts will become even more attractive.
Lower rates of tax on the first $500,000 are proposed where a business is being sold because the owner is retiring.
The only residential property to be exempt from a capital gains tax will be the family home. This excludes the family bach, with the result that any capital gain arising after 1 April 2021 on the family bach will be subject to tax.
Low Income Earners
The key sweeteners focus on low income earners, and are:
The recommendations of the Tax Working Group will not necessarily form the basis of any legislative proposals. The current government consists of three parties with varying policy objectives and ultimately there will be compromise in the final set of legislative proposals.
Any capital gains tax will not come into force until after the next election, with 1 April 2021 being the most likely date. Getting your affairs ready for the new reality can take many months and professional advisors such as accountants and lawyers will be busy aiding their clients. Accordingly, it is better to get in touch sooner rather than later.
Now is a perfect opportunity to consider your broader goals and objectives and to review the structures and investments you currently have in place to see if any changes are warranted. This may go beyond consideration of capital gains taxes and can include the usual suite of items including succession planning, exit strategies and return maximisation. Your advisor should be able to help you with this process.
This is an extremely broad and wide-ranging proposal that captures all capital gains, with few exemptions.
Ultimately the devil will be in the detail and this is yet to be released. If the recommendations of the report proceed, we will end up with an unwieldy, poorly designed, complex approach to taxing capital gains.
We have many concerns with the proposal as it stands. Assets subject to capital gains tax may be held for many years, and even at a couple of percent, inflation accumulates over time. In instances where a capital gain only represents compensation for inflation, a taxpayer will be obliged to pay a capital gains tax even though their overall real wealth has not changed. We consider this inherently unfair.
Our trading partners’ lower rates compensate for the lack of an inflation adjustment in those countries. If New Zealand has full tax rates and no inflation adjustment that is manifestly unfair and out of step with our traditional trading partners.
Rollover relief appears to be limited to some instances on death, business restructures where there is no change of ownership, involuntary events and small businesses. This can make it difficult to grow a business through the sale of an asset and replacement with an equivalent asset.
Because the proposals are so wide-ranging this may be a strategy to present the worst case now, and, therefore make people more welcoming to a ‘reasonable’ regime when it is finalised.
|Our trading partners have an effective lower rate of capital gains, as shown in the table below:|
|Australia||Up to 23.5%|
|United States||Up to 28%|
|United Kingdom||Up to 28%|
The next eighteen months will see much debate on the shape of a capital gains tax with the 2020 election likely being fought over it if the government decides to proceed. This would represent the biggest change in the tax landscape since the introduction of GST in 1986. We will keep you informed every step of the way.