A future Capital Gains Tax (CGT) has been centre stage recently, and while it is only a recommendation at this stage, it raises questions of how it would affect relationship property settlements.
Tax issues are usually not at the forefront a couple’s mind when a relationship breaks down, but maybe now they should be.
We already have a capital gains tax in the form of a bright-line test. This applies to residential investment property acquired since October 1 2015 that is sold (or otherwise transferred) within two years of acquisition unless an exception applies.
If property has been acquired on or after March 28 2018, a five-year bright line test applies.
The Capital Gains tax
The CGT proposes to go further than the bright-line test. Investment gains arising after the implementation date (the valuation day) will be taxed. This will apply to all assets held then, not just those acquired after that date.
The Tax Working Group’s final report, announced on February 21, concerns us regarding the major assets that we encounter in practice:
• The family home: The sale of the family home will not attract any taxation, but lifestyle blocks may.
• The holiday home and other investment properties: The holiday home will be subject to tax, as will any investment properties. It is likely people will seek to retain these properties rather than sell them to avoid the tax. Any rental income derived from these assets will be taxed according to normal rules. A potential issue is when one party sells the investment property or holiday home, post-separation. They will be subject to the capital gains tax.
• Shares: Gains on shares will be subject to the capital gains tax. People will be looking to retain any shares they have. The existing rules continue to apply to foreign shares that are currently taxed under the fair dividend rate method of taxation.
• Small business: Any gains from small business will be taxed at the regular income tax rate.
• Superannuation: Pay-outs from retirement schemes like KiwiSaver will be exempt.
• Companies: It is not clear exactly how companies will be taxed.
• Personal assets: Personal use assets such as cars, boats or other household durables will not be included.
These proposed changes will mean that people going through a divorce will be more likely to hold on to assets like shares and investment properties.
Couples may well have to work out different ways of splitting relationship property without selling it.
It is also advisable to seek the advice of accountants and tax advisors in relation to settlement — especially where there is a high-value relationship property pool.
Overall, these changes — as they stand at the moment, and whether they will stay standing is a moot point — are likely to make relationship property settlements more complex.
If one party is to shoulder a larger proportion of tax, this will be have to be accounted for, literally.
New Zealand’s financial and legal advisers will be busy helping people jump through new hoops and find new loopholes.
This article was first published in the New Zealand Herald.