Tax Bites #15

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

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There is a saying that “an old tax is a good tax”, basically because it is in place and people are used to it. Typically, there is always negative reaction to both the discussion and implementation of new taxes.  The bulk of comment about the Tax Working Group’s (TWG) recommendations has focused on a capital gains tax (CGT).

Hopefully in this article I will clarify a few points about both CGT and planning for it.

Strictly speaking the main proposal is to tax capital gains as income and not to introduce a separate CGT. This is like how Australia treats “capital gains events” as income and Canada taxes realised capital gains. Other countries, such as the United Kingdom and the United States have separate CTG and income tax legislation.

Many capital gains are already taxed as income in New Zealand. The Property Brightline test is the latest, and possibly the best known, of such provisions. Other examples of capital gains treated as income include:

1. The Controlled Foreign Company (CFC) regime;

2. The Foreign Investment Fund (FIF) regime, which includes the so-called fair dividend rate (FDR) option to calculate “deemed returns” on foreign investments;

3. Aspects of the Trust Regime; especially the ordering rules relating to distributions from non- complying trusts;

4. Foreign exchange movements on funds borrowed, or invested, in a foreign currency;

5. Aspects of the financial arrangement rules; and

6. Much of the specific provisions relating to land transactions. For example, associated persons or taxpayers in a business relating to land can be subject to gains on certain land transactions.

Without draft legislation or even government policy it is difficult to comment on how to plan for a CGT, or at least a widening of the tax base. The following general comments may be of assistance:

1. Do not rush into transferring land and shares between entities. First, CGT will only apply to increases in value from the time the tax is introduced. Secondly, such transfers may trigger unintended tax consequences and/or reduce the effectiveness of estate planning initiatives;

2. Undertake a “stock take” of assets that are likely to come within the scope of a CGT and decide whether you want to keep them. I expect that there will be asset sales closer to the time of introduction of a CGT, which may reduce market values;

3. Identify assets that you intend to hold long- term. If appropriate transfer those assets to a trust and have thorough trustee resolutions;

4. Review your will; and

5. Seek appropriate advice.

I expect that the government will adopt a much watered-down approach, possibly:

1. An extension of the Property Brightline test, allowing for a reduction in taxable gains for each full year that the property is held after five years; or

2. Only taxing half the gain as income.

Murray McClennan

Director
Tax Central Ltd
027        244-5365

www.taxcentral.co.nz

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