rhb Chartered Accountants, Tax, Business Services, Tauranga

Capital Gains Tax ?....... Really?

 

The day before the Labour Party leaked that its tax policy would include Capital Gains Tax (CGT), I had been asked if, and when, I thought there would ever be CGT in New Zealand. I responded by saying it would be political suicide for any party to announce such a policy this close to an election. We are however, one of the few countries in the OECD that does not have some form of CGT, so my thoughts are "never say never". Over the last few months I have watched with amusement, the implications of the Labour Party's proposal.

 

Depreciation has been disallowed and now this?

The Government has already taken away depreciation allowances, which will have a major effect on those who are in the business of renting.  Careful consideration needs to be given to both cashflow requirements and taxes payable as a result of the inability to claim depreciation from the 2011/2012 year. Companies and Trusts that hold rental properties need to be thinking about this now.  For many of my clients I have reassessed the 1st Provisional Tax Payment that was due 28 August to allow for the increased taxes due.  Trusts and Companies will be subject to IRD Use of Money Interest if they get this wrong.

What flow-on effect could a Capital Gains Tax have on rentals in New Zealand?

One of the key reasons that many investors get into property is the 'tax free' capital gain.  Now, with low interest rates and no depreciation, there is often a tax neutral position when completing investor calculations, so there is no longer any real tax benefit investing in rental properties.  If CGT is added to this as well, it will diminish the overall investment returns.  This will therefore push rental prices up (which is only possible where demand for rentals is high) and/or reduce the overall value of the house prices.

Does Capital Gains Tax already exist in New Zealand?

The answer is yes! Many New Zealanders would be shocked to learn that we actually have a watered-down version of CGT in New Zealand.  Whilst there is not an explicit tax on capital gains there are some areas where certain taxpayers are taxed on their capital gains.  These include the following situations:

1. Those that purchase property with the intention of resale will be taxed on any gain derived on the sale of the property.
2. Those who are associated to dealers, developers/dividers or builders will be taxed on any capital gain derived on the sale of property within 10 years of acquisition or major improvement (subject to certain exemptions) even if their intention was not resale.
3. Those that are associated to dealers, developers/dividers or builders who purchase property from an associated entity will be taxed on capital gains derived on the sale of the property no matter how long they hold the property for (subject to certain exemptions).
4. Those that purchase shares with the intention of resale will pay tax on any gains derived.

Other Reminders – LAQCs

A reminder that you need to make your final consideration about what you are going to do with your LAQC.  You will be aware from previous articles that losses will no longer be able to be passed through to the shareholders in an LAQC from the 2011/2012 income tax year.  LAQC shareholders have a number of options and the best time to make changes is prior to 30 September 2011.  Options include:

• Transitioning to a Look Through Company
• Transitioning into a Partnership/Limited Partnership/Sole Trader
• Exiting the QC Regime and becoming a normal Company
• Doing nothing and becoming a QC rather than an LAQC

If you have not already made a decision, you will need to contact either myself or your advisor as soon as possible. 

 Janine Hellyer is a Director with RHB Chartered Accountants Limited.

 Published in Tauranga Property Investor Magazine, Spring 2011