Capital Gains – Flight View

This is an informative piece and should not be relied upon as legal or tax advice as it may not apply to your personal circumstance.  It is not intended to provide a complete overview but rather the key points we believe are important for our clients.

If you would like to know more, contact us for a free consultation.

Overview

Capital Gains Tax (“CGT“) has been proposed by the Tax Working Group (“TWG“) in February 2019. If implemented, it is intended to come into effect 1 April 2021.

Capital gain is the profit that results from the sale of a capital assets such as; land, shares, intangible property and business assets.  

TWG has stated that taxable income derived from realising a capital asset should be calculated the same as ordinary income.  TWG’s report states that personal use assets, such as cars, boats and privately used homes will not be subject to the taxation of capital gains.  

Capital Gain = Income – Expenditure

Income = Total sale proceeds 

Expenditure = Costs in acquisition, improvements and sale.

Note: Holding costs, such as those incurred in holding the land are deductible in the year they are incurred.  For land, it includes interest, rates, insurance and repairs and maintenance. 

The tricky part is the value of “Costs in acquisition”.  The TWG stated property will be valued as at 1 April 2021 (termed “Vday“). This does not mean you are required to get a valuation of all your assets.  Rather, if you do not get a valuation, their suggested methods of calculation, 

Nits and Grit

Private Exemption
Generally, a person and their family living with them can only have one excluded home.  This can create issues if you have multiple private homes for different members of your family. 

For example, you have 2 properties, one in Auckland and one in Wellington.  Your children study at university in Auckland but because of your business, you work Wellington.  When you sell the Auckland home, you may be liable for capital gains tax though it was privately used.

Separation/Rollover on death

The concepts proposed follow current tax law, allowing relief for certain life events relating to separation and death.

When a couple ends their relationship and subsequently live separately, they should be allowed a separate excluded home.

Following the prior example, you and your spouse live in Wellington and your children in Auckland. On your separation, you remain in Wellington to work and your spouse lives with the children in Auckland.  Prior to your separation, Wellington was your private excluded home. However, after separation, as you have chosen to live separately, you can each have your own separate excluded home.

Where the excluded home is transferred on death, and the beneficiary uses it as their excluded home, it will continue to be an excluded asset for the beneficiary. If the beneficiary uses it for any other purpose it will become an included
asset for the beneficiary from the time it is transferred to them, with the cost base being the market value at the time of transfer. 

Mixed Use

If you use your private excluded home for income-earning purposes (such as AirBNB, Home Office or Boarding). When a property is used for income-earning purposes you have 2 options as to how the property should be taxed:

If the property is used more than 50% as the person’s home, you can choose to treat the entire property as their excluded home, but will be denied any deductions for costs relating to the property and return all income relating to the income-earning use; or

Apportion their capital gain when you sell the property and pay tax on the portion that represents your income-earning use.

We see this as a potential area of complexity and would urge you to consult a tax professional (such as ourselves!) if you have any income-earning activities on your property.

Our thoughts

The introduction of CGT would be in tune with NZ’s tax system’s “Low Rate Broad Base” approach and provide further horizontal equity, such that all amounts earned are “taxed of the same amount”. 

This writer notes that it would increase compliance costs and complexity in the tax system.  Current tax legislation does take into account speculative behaviour of capital property (termed “revenue account property“) so at a distance there is not exactly a need for CGT. 

The introduction of any new rules if not properly integrated with our pre-existing rules increases the complexity of outcome. This can lead to an increase in ambiguity and initial misapplication of tax law. 

We are keen to see if the Labour Government will properly implement these new rules and CGT.

References
Tax Working Group,  https://taxworkinggroup.govt.nz/media-resources-final-report