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Unforeseen fishhooks in proposed CGT Unforeseen fishhooks in proposed CGT

Since the release of the Tax Working Group’s (TWG) recommendations for tax in New Zealand, the media has been awash with articles on the affect that capital gains tax (CGT) will have on taxpayers in New Zealand. Everyone has an opinion. A large focus of the recommendations has been on CGT and how that will affect property, however clearly the proposed CGT regime has a much wider reach, particularly for the 450,000 or so small business owners in New Zealand. There are however also quite a number of taxpayer friendly recommendations within the TWG report.

 

Whether you are a supporter, or not a supporter of the proposed CGT, there are various scenarios coming to light which will clearly be affected by the current proposals.

For a number of years the property market, particularly in Auckland, has moved to the point that many people are no longer in a position to purchase property as the price of real estate has increased.  Although there are many views on why this has happened, ultimately it is a result of supply and demand.  Some parents are therefore looking at ways they can assist their children to purchase a property.  One method has been to assist them to purchase a small rental property to get the children in the property market.  This allows the children to save further funds over the next couple of years while the property is rented, until such time that the children are in a position to move into the property.  Under the proposed CGT rules this will no longer be viable given as soon as there is a change of use of the property, from being a rental property to being the owner's residence, this will trigger a CGT event.  CGT will then be payable on any gain accrued since the introduction date for CGT.

Other situations have also come to light over recent days, when thinking about how the impost of CGT may have an effect.

One such situation relates to people that have been unlucky to have owned a leaky building that has been rented. There are many cases around at the moment where large apartment blocks are leaky buildings. If a person had purchased an apartment for $500,000 to rent out and then found they needed to spend $300,000 on leaky building remedial work, their total costs for the property would be $800,000.  As it stands, the Inland Revenue are indicating in most circumstances, leaky building remedial work is capital expenditure and non deductible. Their view being that the work will typically involve bringing the building up to code and thereby changing the character of the building.  If CGT was introduced as proposed, there would be a requirement for owners to obtain a valuation for the property effective on the date of the introduction of CGT.  The market value of this apartment after the leaky building has been fixed may however still only be $500,000.  Accordingly, even though the person may have spent $800,000 on the property, if they sold it for more than $500,000 prima facie they would incur CGT.  This would not seem to be an appropriate outcome, and I would hope the legislators work through possible scenarios and valuation methods as they get into more detail and draft the legislation.

Time will tell if a CGT makes its way through Parliament and gets introduced into the New Zealand tax system.  As I write this, today's headlines of "Defeat seems likely for CGT" does not bode well for the Government.

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