22 Feb 2019

The Tax Working Group recommendations: What it means for you

7:17 am on 22 February 2019

The Tax Working Group's (TWG) final report suggests an expansion of the taxing of capital gains aimed at easing the burden from income and sales taxes to capture more of the presently untaxed gains on capital.

Papers at the release of the Tax Working Group recommendations.

Papers at the release of the Tax Working Group recommendations. Photo: RNZ / Rebekah Parsons-King

It hopes this would make the tax system fairer and encourage investment in productive activities rather than sectors such as property.

The TWG has also made recommendations to raise the income tax thresholds to give low and middle income groups essentially an income boost, no changes to GST, and some changes for investments which would encourage retirement saving.

It's also raised the idea of greater environmental taxes to cope with waste, pollution, water use, traffic congestion.

But what are the taxes, how are they organised, and who would be affected.

Check out RNZ's Tax Working Group coverage:

What is a capital gains tax?

It taxes the rise in values of assets. For example, if you buy an investment property for $500,000 and sell it $750,000 the gain is currently untaxed and pure profit.

Under this proposal, the $250,000 gain would be added to your income for the year and taxed at the marginal (top) tax rate.

Which countries have a capital gains tax?

Virtually all of Europe, the United Kingdom, United States, Latin America, Australia, parts of Asia ... in fact it's easier to ask which countries do not have a capital gains tax.

New Zealand is one of a small club, which includes Switzerland, Hong Kong, and Singapore, but also tax havens such as Monaco and Cayman Islands.

Don't we already have a capital gains tax?

Sort of. The brightline test taxes the capital gain on an investment property sold within five years of buying it. If I play the sharemarket like Gordon Gecko in Wall Street, trying to make quick profits then I am treated as a trader (as opposed to a long term investor) and I am taxed on the capital gains, but also if I lose money I can use the losses to offset tax.

But virtually everything else is tax free, such as if I sell my business.

Sir Michael Cullen at the Tax Working Group announcement.

Sir Michael Cullen at the Tax Working Group announcement. Photo: RNZ / Rebekah Parsons-King

What would be taxed?

All properties apart from the family home.

The sale of a business including the goodwill - the intangible value which reflects a business's reputation, its broad level of customers, the quality of its brands, the value of intellectual property such as smart computer programmes.

What won't be taxed?

The family home, cars, boats and personal effects such as paintings, jewellery.

When would it come into effect and would historic capital gains be taxed?

Any capital gains tax will only take effect after the next election. The capital gains tax meter would start running from 1 April, 2021. The gains on deals made before this date would be unaffected.

Once in operation taxpayers with assets likely to be covered would have five years to give the asset a starting value. For property that might be when the two or three-year QV revaluation is done.

What about my KiwiSaver?

The changes suggested are aimed at encouraging low to middle income earners to save more.

It recommends KiwiSaver funds pay a lower tax rates on some investments. Members get a higher tax credit for each dollar saved. Those on parental leave to get maximum tax credit even if they do not make the required minimum contribution of $1024. Refund the employer super tax contribution to savers on an income of up to $48,000.

Changes to the way domestic and foreign shares would be taxed might affect KiwiSaver fund investment returns.

What about my income tax?

The group was not allowed to look into raising income tax. But it suggests raising the tax threshold for the bottom two levels of the tax system. That would mean people paying a lower tax rate on more income.

The extra money taxpayers would have if the thresholds were changed varies between $200 and $1300 per year depending on whether they're married and with children.

How much will it raise and how much will it cost me?

It will take time to broaden the net, but the estimate is $8 billion in the first five years. But the aim is to recycle the gains rather than fill the government's coffers.

It's estimated the capital gains tax would cost less than 1 percent of the disposable income of 70 percent of households.

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