The Issue

Q: When will the capital gains tax be introduced?

A: In late April, the Government will respond to the proposals made by Dr Michael Cullen’s Tax Working Group, including the proposed capital gains tax. The Government is aims to have new tax legislation take effect from 1 April 2021. To deliver that, the Government will need to pass legislation prior to the 2020 election, which will require legislation to be introduced to Parliament during the middle of 2019.

Q: Who will be affected by the capital gains tax?

A: The Working Group’s capital gains tax proposal will apply to businesses, shares, investment property, commercial property, and intangible assets – like goodwill.

Q: So the family home is exempt?

A: Not quite. First, the exemption only applies to properties smaller than 4500m2. Capital gains tax will apply on any amount of land exceeding the 4500m2 threshold, including any improvements made by the homeowner.

In addition, if you take in flatmates, or list a room on a service like AirBnB, a portion of your capital gain will be taxable.

There are many more situations in which the ‘family home’ will be taxed, such as when a homeowner enters a relationship with another homeowner, or when someone moves into a rest home and is not able to quickly sell their home.

Q: How much tax will I have to pay?

A: The capital gains tax will treat realised capital gains just like any other type of income, so you will pay tax at your marginal tax rate. If you are selling a large asset like a farm or a house and you have some other form of income, you will probably pay capital gains tax at a rate of 30 or 33 percent – one of the highest capital gains tax rates in the world.

Q: When will I pay capital gains tax?

A: You are obliged to pay capital gains tax when you sell an asset (‘on realisation’), unless the asset is a sufficiently small family home.

Q: What about if I own an asset before the capital gains tax is introduced?

A: You will be obliged to pay tax on any capital gains made after the tax is introduced, which is expected to be 1 April 2021. In order to estimate the gains made since 1 April 2021, you may need to get your property, business, or farm professionally valued, in order to ensure you don’t pay too much tax.

Q: What about inflation?

A: The capital gains tax proposal does not account for inflation. If your bach or farm is only increasing in value by the rate of inflation every year, you will still be required to pay tax on the gains – even if they represent no increase in the underlying value of the asset.

Q: Beyond the ‘family home’, are there any other obvious exemptions?

A: Art, boats, cars and other personal assets (jewelry, for example) are all exempt. The Working Group has recommended the Government explore possibilities around special provisions for iwi.

Q: How will it affect KiwiSaver?

A: KiwiSaver will be affected by the capital gains tax. If your KiwiSaver fund is heavily exposed to domestic shares and property, you will be more heavily taxed than someone who is just invested in a cash or low-risk fund. The Working Group has proposed that low income taxpayers should receive tax relief to compensate for this effect, but it is still unclear whether the Government will accept this.

Q: How will this affect the housing market?

A: While the ‘family home’ exemption is well-intended, it could worsen housing affordability. Since home ownership would receive a tax break compared to other forms of investment, home owners would be encouraged to put lots of money into their own house. This ‘mansion effect’ could result in a gold-plated residential property sector, making it even harder for young people to get on the property ladder.

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