The Final Report of the Tax Working Group (TWG) was publicly released this morning, ending months of speculation about its recommendations.
We expected the Government to say more than it did in response to the Final Report. It is keeping its options open and has signalled that a measured approach will be adopted with options to pick and choose aspects of the TWG's recommendations. The Ministers indicated that it was highly unlikely all recommendations would need to be implemented. Further Government announcements are expected in April.
The Tax Working Group was divided 8:3. The majority recommends a broad extension of the taxation of capital gains in New Zealand.
The capital gains tax would:
Not apply to the "excluded home" (a single family home).
Operate under a traditional realisation-based model, taxing only realised gains (in most cases, at least).
Apply only to gains made on assets after the implementation date (requiring a valuation of the assets).
Apply at ordinary marginal tax rates on the full amount of the gain.
Contain a limited number of exemptions for certain asset classes, such as personal use assets.
Not impact on the current rules for foreign equity or financial arrangements.
Include roll-over relief on death and relationship separation (and certain business reorganisations).
Ring-fence capital losses on certain asset classes including privately used land.
The minority view advocates a more targeted approach initially limited to residential rental property.
The difficult boundary issues will no doubt receive a lot of attention in the coming months including the scope of the "excluded home" concept and how the proposed tax will apply to intergenerational asset planning.
The Final Report also recommends tax reform in a number of other areas, including the introduction of environmental taxes, amendments to the taxation of KiwiSaver and PIE investments, and certain targeted changes to the taxation of corporates and charities.
We will digest the contents of Final Report over the coming weeks, and provide more detailed comment at a later date. We are already advising on the impact the TWG recommendations will have on various businesses. If you would like to discuss the Final Report and its relevance to you please contact the Bell Gully tax team.
Other developments – a digital services tax
A further area of particular interest to multinationals that was commented on in the Tax Working Group's Interim Report is the potential introduction of a New Zealand digital services tax. In a press release issued earlier this week, the Government signalled its intention to introduce a tax of this nature on multinational companies operating in New Zealand. The timing of this announcement was somewhat unexpected, given previous suggestions that New Zealand would be a "fast follower" rather than an "early mover" in this area. The Final Report had noted that countries such as the United Kingdom and France have announced their intention to introduce a digital services tax, with Australia in the consultative phase, yet had not recommended immediate action.
Any digital services tax would apply to certain digital revenues of multinational companies generated through their New Zealand users, and could potentially apply to owners of platforms such as social media networks, online marketplaces and search engines, as well as other online advertisers. Further details on the design of this tax will be provided in a discussion document expected to be released in May this year. A digital services tax applying to gross revenues of corporations who have no permanent establishment in New Zealand would represent a significant shift away from traditional international tax principles, and could be one of the first steps towards a more drastic re-think of how the international tax framework will apply in the digital age.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.