Potential CGT impact
Question from Darren updated on 1st March 2019:
With the tax working group looking at capital gains tax and their final report just released I'm wondering how that will effect me. We purchased our rental back in 2003 and have approx $600,000 gain. Even if capital gains go-ahead will it only be on new properties purchased after the effective date of the new rules or will it likely still apply to ours? Also, if we keep the property and never sell - ie: it goes into our estate when we pass to hand on to our children - will it still be eligible for CGT even though there's currently not inheritance tax in NZ?
Our expert Matthew Gilligan responded:
Those are excellent questions, which in the absence of a crystal ball I cannot answer definitively, particularly in regard to your estate query. I do have some thoughts, however, but before I get to that I want to confirm the likely path that this legislation is going to take. The Tax Working Group’s report has just been publicly released. As suspected, the TWG recommended that a capital gains tax be implemented. Their report gives suggestions as to how the tax should apply but they have recommended that it applies to all properties and not just new properties acquired after the date of enactment. The tax is likely to be triggered when a property is sold - or deemed to be sold.
Your question as to whether death will trigger a deemed disposal is a great question and one which we cannot answer without there being legislation for us to refer to. Further, while the TWG has recommended that CGT should apply to all existing properties, it hasn't recommended that it be retrospective. So the gain that you have accumulated from 2003 till now will not be taxable. The TWG recommends that there is a “valuation day” at the point that the legislation is brought into effect and it is gains from that day forward that are taxed. In other words, my expectation is you will be able to revalue the property at the date that CGT starts to apply, and it would be your gains from that point forward that will eventually be taxed on disposal.
The other important point to note here is that just because the TWG has recommended a capital gains tax does not mean that the government will adopt it and furthermore there is no guarantee that they will adopt it in the exact form that it is recommended. What we do know is that any tax changes in this regard that may pass through parliament in the next year or so will not be effective until after the next election. Thus, there is no prospect of capital gains tax applying until late 2020, likely 2021. As noted, there is a lot of water to go under the bridge yet as well as an election to occur which could have an impact on whether capital gains tax ever comes into effect, but those are my thoughts on the technicalities in response to your question.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.Search the Ask an Expert archive
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