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Life Without CGT

Despite dropping plans for a capital gains tax, there may still be tax reforms on the horizon, writes Matthew Gilligan.

By: Matthew Gilligan

1 June 2019

Given last month’s surprise announcement that Labour will not enact any form of capital gains tax (CGT) while Jacinda Ardern remains leader, it is worth contemplating what to expect moving forward. Certainly the expectation had been that Labour would go into the election campaigning on a platform of CGT applying to at least property. Now that we know that is not the case, one wonders what other changes or impacts will arise. Here are my thoughts:

• Without the revenue from CGT, I expect Labour to push for tax hikes. This is pure conjecture on my part, but I would expect them to add a new top marginal rate at a higher threshold, or simply increase the existing top marginal rate. Currently personal income above $70,000 is taxed at 33%. I would not be surprised to see a new marginal tax rate of circa 40% applying to income above a new higher threshold. (For example – income above somewhere in the low to mid $100,000s being taxed at 40%).
• There will be increased focus on enforcing existing land tax rules. Whilst CGT captured a lot of attention, what seems to slip by with less notice is the fact that there are a wide range of existing income tax provisions that capture gains realised on the sale of property. With the extension of the bright-line period to five years, the IRD have plenty of ammunition to chase revenue in the property space.
• Readers should be aware that you are taxable on gains realised on the sale of property not only if you sell residential property within the brightline period, but also under the following circumstances (all of which I expect to be policed with more vigour by IRD in coming years):

– You buy with the intention of resale or as part of a business of property dealing, development or erecting buildings; – You sell within a specified 10-year period if the seller is associated to another party in the business of dealing, developing or building; – The property has been the subject of a subdivision or development, irrespective of your intention at time of acquisition and irrespective of whether you are in the business of dealing, development or building; – If the land has increased in value due to the obtaining of a resource consent or a rezoning of the land and you sell within 10 years.

• As a matter of interest, there is an indication in the Government’s response to the Tax Working Group report that the tax provision capturing gains on sale of land within 10 years where there has been an increase in value due to a resource consent or rezoning, may be repealed. The perception is that this rule may be locking up supply of land.
• The impact of the ring-fencing rules will increase over time when interest rates rise. In the current low interest environment I suspect that these rules (which I expect to be effective retrospectively from April 1, 2019) will have relatively minimal impact. However, that will not be the case forever. I expect there to be fallout as highly geared investors who do not have large amounts of surplus income, struggle to cope with negative gearing in a high interest environment without the benefit of tax relief through the use of losses. These rules are socially regressive in this regard.
• While the Government rejected the TWG’s recommendations with regard to implementing CGT, they have stated that they intend to explore options for taxing vacant land. Albeit the responsibility for this is being kicked down to local government. Therefore watch for possible new council levies or premiums attached to rates for vacant land.

In summary, the surprise CGT back down is good news for property investors. However, this is tempered somewhat by the impact that the loss ring-fencing rules will have over time. I also expect this government to increase the marginal tax rates, sooner than later, but this is speculation on my part.

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