Capital gains tax proposal one of the world's 'most comprehensive and toughest', says tax expert

The proposed capital gains tax is "one of the most comprehensive and toughest" proposals in the world, a tax expert has said.

KPMG tax partner Bruce Bernacchi admitted on TVNZ1's Breakfast that he was surprised by the breadth of the proposal.

"There were some surprises in there, I think the breadth of the tax, the fact that it’s only the family home and certain personal, your boat, your car, jewellery etcetera that are out as are investment in certain foreign shares otherwise everything is in," he said.

"It’s taxed at full marginal tax rates so there’s no adjustments for indexation for inflation, it’s coming in at full marginal rates whereas other countries tax capital gains at a lower rate."

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Q+A’s Corin Dann examines the report of the Tax Working Group with its head, former Finance Minister Sir Michael Cullen. Source: Q+A

"There’s no discounting for example in Australia if you’ve owned as asset for more than 12 months they’re going to tax you on half your capital gain so none of that."

"Otherwise you are basically getting taxed in inflation, if you buy an asset today worth $100, it goes up in value just due to inflation due to $120, you’re going to pay tax on the $30 rather than just the real economic gain."

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Chances of getting passed

The proposal was so tough that Mr Bernacchi didn’t believe the Government would accept it in its current form.

"I’m going to say that in its current form I don’t believe this will be in law on the 1st of April 2021," he said.

"There’s a great article by Liam Dann in yesterday’s Herald that suggests that this report has come out recommending a very comprehensive capital gains tax to give the Government an argument to scale back to what they really want which is just CGT on residential properties which the entire tax working group agrees with."

"So, there’s a chance the Labour party may not go with a full thing then you’ve got to get it past New Zealand First and then if the Nats win the 2020 election they’ve promised to repeal it so."

Mr Bernacchi predicted that what would eventually pass was what a minority of the tax working group members had recommended.

"I think there’s a very good minority view, only three of the eight members endorse the full CGT, I think the minority view is what we’ll end up with," he said.

Softening the proposal

Mr Bernacchi said there were two ways the Government could soften the proposal.

"The two big ones would be tax it at a lower rate or half the amount you pay tax on to do some sort of discount, those are the two big things that are done overseas."

It was important to note that the capital gains tax would not be retrospective, Mr Bernacchi said.

"That’s a really important point, I’ve spoken to a lot of people who have been scared about assets they’ve owned for 10 years that have gone up a lot in value so no," he said.

"That’s one of the complicated design features you can only be taxed on capital gains made after the 1st of April 2021, assets are going to have to be valued at that date."

For residential property, council and registered valuations would be used while shares have a market value but it became trickier with business assets.

"For other business assets, it’s going to be very tough so people are going to be given five years to actually work out what the assets they owned in 2021 were worth."

Who will be most affected

The rural sector would be among those most affected the capital gains tax in its proposed form, Mr Bernacchi said.

"People who own residential property who are going to own them for longer than five years so they’re outside the existing brightline test, small business owners, the rural sector because while there is a carve out for a family home that only extends to 4,500m2 of land so just roughly over an acre around the family home."

What should you do?

Mr Bernacchi advises people to invest in foreign shares and get bigger family homes if they’re able to.

"If you want to get out of this tax, I’ve got two things, buy a bigger house, if you’ve got spare money lying around, buy a bigger house because any increase in the value of your family home is not going to be taxed," he said.

"The other one is buy foreign shares, at the moment you’re not taxed on gains on shares made on New Zealand companies and listed Australian shares."

"There’s a special regime on foreign shares, you pay tax in a deemed five per cent return but if you think that you are going to buy shares in a foreign company that’s going gangbusters and it does, you’re not going to pay capital gains tax on it, so pile into your offshore equities."

The good news

The capital gains tax would have some benefits with the working group proposing increasing the threshold of the bottom tax rate and eliminating tax on Kiwisaver contributions for lower income earners, Mr Bernacchi said.

"The package is revenue neutral and that’s an important point so they’re expecting it to raise $8 billion over five years and what the working group has done is given a range of recommendations on how you spend that."

"They’ve given four package options on how it could be spent, each one of them proposes increasing the threshold of the bottom tax rate which applies at a 10.5 per cent rate. It currently sits at $14,000 and their proposal is to increase that to $20,000 or even up to $30000."

"There are other changes around eliminating the tax on Kiwisaver contributions for people earning less that $48,000, other options is to increase the amount of the Government’s tax credit, put money into Kiwisaver, the Government puts in 50 cents up to a maximum of $1024 a year, increasing that."

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The breadth of the capital gains tax proposed to the Government by the Working Group has surprised KPMG tax partner Bruce Bernacchi. Source: Breakfast