There is no doubt the Tax Working Group’s recently released interim report is the topic du jour. Accordingly, it is only appropriate that I offer my two cents’ worth, particularly in relation to the comments on a possible capital gains tax.

• The Tax Working Group (TWG) has ruled out a land tax or an inheritance tax, but appears to me to clearly be pushing towards implementation of capital gains tax (CGT). They have noted that it is premature to form a view without firstly determining exactly how the tax may apply, but I would be highly surprised if their final report did not support implementation of CGT.
• The TWG is of the view that CGT should apply across assets broadly, so not restricted solely to real estate. It would also apply to shares, intellectual property, goodwill, business assets, etc. The one exception to this will be the family home.
• In terms of the more detailed design, it is likely the TWG will push for the tax to be levied on realisation, rather than on an accrual basis, and that capital gains are treated like all other forms of ordinary income. In other words, no specific tax rate applying to capital gains.
• If capital gains are to be taxable when realised on sale, then I suspect it will apply to all assets and not just those acquired after the date of implementation. However, it will apply only to gains after the date of implementation. This will likely create an incentive to maximise the value of capital assets in the lead-up to the implementation of CGT, should it come in.
• There is discussion around whether capital losses should be ring-fenced or available for offset against all forms of income. This will be a very interesting aspect of the design of the rules with the TWG seemingly supportive of not ring-fencing tax losses, subject to some exceptions.

‘It is likely to be great news for tax consultants and property valuers, but not so good for property investors’

Moving away from the detail and speaking more philosophically, I have some reservations about the wisdom of introducing CGT. In fact I have more than a few but here are some:

• It may create perverse incentives. For example, take an investor with a property that has increased in value from $1 million to $1.5 million. In a CGT environment, rather than selling the property to realise the gain, they may choose to borrow against the increase in value to access their capital, with the cost of that borrowing being offset by the benefit of not triggering a tax liability on the $500,000 gain and the costs of sale.
• Consider a homeowner looking to move up the property ladder who wants to retain their existing home as a rental property. Given the exemption from CGT for the home, rather than retaining an $800,000 ex-home and adding it to New Zealand’s rental stock while buying an upgraded $1.2 million home, they will be incentivised not to have a rental property and instead to buy a higher value home (e.g. $1.6 million) thus investing more capital in their private occupation. This is one example of the so-called “mansion” effect.
• The complexity of any CGT regime is going to be huge. A disclaimer here: as the owner of an accounting practice this will be great news for me, but terrible news for taxpayers who now need to grapple with the new rules.
• Commentators in the finance industry have pointed out similarly perverse consequences as a result of any proposal for CGT to apply to direct investment in New Zealand shares, but not to foreign shares nor certain managed funds.

In closing, this is a topic we will have to keep a close eye on and there is a lot of water to flow under the bridge yet. It is likely to be great news for tax consultants and property valuers, but not so good for property investors who have worked hard to accumulate capital and invested it prudently for their retirement.