Of the recommendations offered by the Working Group, talk around the Capital Gains Tax has been front and centre with Government signalling their desire to make changes in this area.
Whilst it is stressed at this stage, they are only recommendations, it is important to consider the implications with regards to relationship property settlements.
New Zealand already has a ‘Brightline Test’ as a form of Capital Gains Tax. The Brightline Test means that any residential investment property purchased after 1 October, 2015 and is then subsequently sold within 2 years is met with tax obligations unless an exemption applies. The legislation was then amended so that any investment property acquired after 28 March, 2018 and thereafter sold is now subject to a 5-year Brightline Test. The Tax Working Group recommendations propose going beyond the scope of the current Brightline Test. The proposal recommends introducing what would be known as ‘Valuation Day”, where any gains on investments after this date would be taxed and would be applied to all assets and not simply those acquired after a given date.
With changes such as this forecast, and amendments to the ‘Brightside Test’ in general, it will be important to address taxation issues with regards to any relationship breakdown. The final report from the Tax Working Group proposes the following concepts when settling relationship property disputes:
- The Family Home – Selling of the family home will not attract any tax obligation, but lifestyle blocks may be subject to taxation.
- Holiday Homes and Investment Properties – Holiday homes and investment properties will be treated the same and both would be subject to tax. Any income received from these will be taxed in accordance with normal tax rules. This may mean people are likely to retain these assets as part of the relationship property agreement. However, it should be noted that if the property is sold post separation, it would be subject to Capital Gains Tax under the proposals put forward by the Working Group.
- Superannuation – Pay outs from retirement schemes such as KiwiSaver will be exempt from investment gains taxes.
- Personal Assets – Assets such as cars, boats and other household items acquired for personal use will not be subject to tax.
- Companies –How taxation will be addressed in this area is uncertain and the recommendations afforded by the working group offered no further clarification or potential resolutions.
- Small Businesses – Small businesses will be taxed at the regular income rate on any gains made.
- Shares – it is likely people will retain shares, as any gains would be subject to Capital Gains Tax if the recommendations go ahead. Existing rules will still apply for foreign tax shareholders which will continue to be taxed under the fair dividend rate method.
The proposed changes could mean separating couples will be more likely to retain assets such as property and shares to circumvent any taxation payments at the time of dissolution. Should the changes come into effect, it could mean significantly different ways of splitting assets, to avoid selling or dividing them in a way that would incur taxation costs.
If a party shoulders a larger tax portion at the time of separation future issues will need to be addressed appropriately. This will need to be accounted for when dividing assets and ensure these future issues are addressed appropriately. As such, advice from accountants and tax advisers will also need to be sought in relation to settlements. The proposed changes would ultimately increase the costs of settling relationship matters as they become more complex involving a wider range of third parties.
Whilst these changes are only recommendations at this stage, it is most certainly an area that needs to be considered carefully. Should you need any assistance with your separation, get in contact with our office today.