The initial report of the Tax Working Group (TWG), was released yesterday. It suggests that no separate Capital Gains Tax should be introduced, but rather that the idea of “income” could be extended to include various forms of capital gain.

The impact of this would see these gains being taxed at the taxpayer’s marginal rates as “income”.  This approach is contrary to past Labour proposals and the approach of some countries, which have a separate tax regime, and a tax rate likely to be lower than marginal rates. Such rules could include gains on most forms of investment including equity and property, however the family home would be excluded.

A “valuation day” approach is suggested which would mean only gains, on all assets, from the implementation date would be subject to tax.  There are various suggestions of how the value at that date will be arrived at.  However, it is fair to say the valuers will be gearing up for the extra work that the implementation of this tax would produce.

The TWG was established last year by the incoming labour-led government, and was given the brief to take a big-picture review of the fairness and effectiveness of NZ’s tax system.  Being chaired by former finance minister, Sir Michael Cullen, the TWG was widely expected to address the idea of taxes on capital gains, and their interim report has produced no surprises here.

A second option of taxing investment assets based on a deemed return is mentioned, however it seems highly unlikely such a method would be applied.  Perhaps this is raised to give the report a perception of balance, when it was clear from the start that the taxing of realised investment gains was always going to be suggested as an outcome.

The TWG has requested submissions, and the Finance minister, Grant Robertson has reiterated earlier statements that no changes will be implemented this term.  We expect that the final recommendations of the TWG will form a key issue in the run up to the 2020 general election.