The long awaited Tax Working Group (TWG) report has finally been released and as predicted, has recommended the introduction of a comprehensive capital gains tax (CGT).

But the TWG was far from unanimous in their recommendation, with a quarter of the panel refusing to support the recommendations in their current form.

Dissenters included many of the most respected authorities on tax in New Zealand including policy official Robin Oliver, tax lawyer Joanne Hodge and Business NZ leader Kirk Hope. What wasn’t predicted, and what may account for the dissension in the working group, is that the proposed CGT would be one of the world’s harshest regimes of its kind with the rate set at the high marginal income tax rate, that for most will mean 33%.

By contrast, in Australia, whilst CGT on individuals is set at their marginal tax rate, a 50% discount is applied if the asset has been held for more than one year.

Whilst commentators are already diving into the detail of the report’s recommendations there are a few key things to understand, and they are primarily political.

Firstly, there is very little to be gained by focusing on the TWG’s recommendations. They are only that, recommendations, to a government that must now decide what to do with the highly charged tax grenade that they requested, which has now been lobbed into their trench.

‘The Tax Working Group were far from unanimous in their recommendation, with a quarter of the panel refusing to support the recommendations’

The Government will respond to the report recommendations in April 2019 and this will be when we find out what they have accepted and what they have rejected from the TWG’s report.

You can be certain the Government will water down and cherry pick the portions of the recommendation they can live with politically when actually forming their policy.

Already, the Prime Minister has made statements assuring small business owners and farmers that their interests are forefront in her mind.

No mention though of the hardworking Kiwis that provide the country’s rental housing stock.

Until we see the Government’s response, the ultimate form the CGT policy may take is pure speculation.

The Government has given an undertaking that CGT will not be passed into law before the next election, so the people will ultimately have the opportunity to decide if this happens.

Elephant In The Room

Secondly, there is a political elephant in the room in the form of Winston Peters and NZ First.

It’s impossible to consider CGT without first contemplating what position Peters will take.

NZ First has always opposed a CGT but has chosen coalition government with parties that support it.

Their opposition to CGT provides Peters, should he choose it, the perfect card to play to differentiate himself from Labour and the Greens in the run up to the next election.

His position on CGT may well determine whether he can get back over 5% support and again secure the balance of power at the next election.

He can then put a stop to CGT by either backing National who oppose it or requiring Labour to abandon the plan as the price for another term in government.

So, what of the tax proposal itself?

It seeks to be comprehensive, both in its application to asset classes and its rate, set at the full marginal income tax rate.

The family home will be exempted, meaning that already two thirds of residential property in New Zealand will fall outside the tax.

This exemption will promote “mansion building” as Kiwis invest in increasing the capital value of their personal homes rather than their investment assets, and in so doing avoid CGT.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz