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Harcourts Waikato Market Commentary
Monarch Commercial Limited MREINZ Licensed Real Estate Agent (REAA 2008)
Issue 28 | March 2019
Background The Government’s Tax Working Group, chaired by Sir Michael Cullen, provided recommendations that would improve the fairness, balance and structure of the tax system over the next 10 years. Is this issue important for Property Council members? Introduction of a capital gains tax could cost the sector $100’s of millions, then billions a year. A poorly designed one will cost more when compliance costs are factored in. The report recommends a broad capital gains tax, but the key target will be land and buildings (residential property investment, commercial/ industrial and rural property). There are only a few limited recommendations that would help mitigate the effects of a capital gains tax on the commercial property industry. It is important to note the report is simply a set of recommendations to the Government. There is a difficult and lengthy (months to years) political process to go through before any changes become law. The results of that are highly uncertain given some parties in the Government are sceptical/opposed to capital gains tax. General recommendations • The Group agree that there should be an extension of the taxation of capital gains from residential rental investment properties. • Majority of the group support the introduction of a broad approach to the taxation of capital gains (i.e. onto business assets, shares etc). (Key business friendly members of the TWG opposed and issued a minority report.) • The Group does not see a case to reduce the company rate at the present time or to move away from the imputation system. • The Group does not recommend introducing a wealth tax. • The Group does not recommend introducing a land tax. • Recommended retaining the imputation system. • Recommended changes to the losscontinuity rules, expanding deductions for ‘black-hole’ expenditure and concessions for nationally significant infrastructure projects. • Subject to fiscal constraints, the Government could consider restoring depreciation deductions if capital gains taxation is extended. Key recommendations for commercial property The Group recommended: • Including gains and most losses from all
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types of land and improvements (except the family home), shares, intangible property and business assets. Only taxing gains and losses that arise after the implementation date (Valuation Day). The tax be imposed on a realisation basis in most cases. Expenditure incurred in acquiring a taxable asset will be deductible at the time of sale. Similarly, costs incurred after acquisition on making improvements to the asset will also be deductible from the sale proceeds. Capital losses be ring-fenced for: portfolio investments in listed shares (other than when they are trading stock); associated party transactions; and losses from Valuation Day assets. Capital losses on privately used land be denied entirely. Capital losses (other than those described above) be treated in the same way as other tax losses and taxpayers should generally be able to offset losses arising from the disposal of capital assets against ordinary taxable income. Consider restoring depreciation deductions for buildings if there is an extension of the taxation of capital gains, subject to fiscal constraints. To manage the fiscal costs, the Government could reinstate building depreciation on a partial basis for: > seismic strengthening only > industrial, commercial and multi-unit residential buildings. Reform the treatment of black-hole expenditure, with: a) a new rule to recognise deductions for expenditure incurred by businesses that is not otherwise dealt with under the Income Tax Act 2007, including in respect of abandoned assets and projects. b) a claw-back of tax deductions where
an abandoned asset or project is subsequently restored, such that those deductions would be capitalised. c) the spreading of black-hole expenditure over five years. • Consider tax measures that encourage building to higher environmental standards. • A range of recommendations to change the PIE regime, including specific provisions relating to “property PIEs”, at first glance these changes appear to have negative connotations). Interestingly, the minority report inserted into chapter six mentions a couple of key points; firstly, the lock-in effect. Unless there are generous roll-over relief provisions, businesses may be penalised for trading up to new/different assets. The taxation of capital gains will effectively be a stamp duty, acting as a brake on market transactions potentially preventing transactions occurring because of that tax cost with a consequential lost opportunity for growth. There could be cases of double taxation where business earnings are taxed and undistributed and shares in the business are then sold. There does not appear to be an easy solution to this. We expect the Government to ignore or amend several of these recommendations based on the political climate. We still have a lot more work to do and will need to keep on top of this issue. Source: Property Council New Zealand (abridged)
ALSO INSIDE... • Opportunities Knocking • Retail shows signs of revitalisation • Record growth leads to lowest industrial vacancy ever
Monarch Commercial Ltd (REAA 2008) • Cnr Victoria & London Streets, PO Box 900, Hamilton 3240 • Ph 07 850 5252
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TAX WORKING GROUP RECOMMENDATIONS FOR PROPERTY