A future Capital Gains Tax (CGT) has been centre stage recently, and although these are only recommendations at this stage, they raise questions of how they would affect relationship property settlements. Tax issues are usually not at the forefront of 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 1 October 2015 that is sold (or otherwise transferred) within two years of acquisition unless an exception applies. If property has been acquired on or after 28 March 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, which was announced on 21 February, concerns us regarding the major assets that we encounter in practice:
1. The family home
The family home is usually the biggest asset. The sale of the family home will not attract any taxation, but lifestyle blocks may.
2. The holiday home and other investment properties
The holiday home will be subject to tax, as will any investment properties. It is likely that 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 and this will have to be accounted for in settlement.
Gains on shares will be subject to the capital gains tax, too. 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.
4. Small business
Any gains from small business will be taxed at the regular income tax rate.
Pay-outs from retirement schemes like Kiwisaver will be exempt.
It is not clear exactly how companies will be taxed.
7. 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 onto assets like shares and investment properties. Couples may well have to work out different ways of splitting relationship property without selling it.
The cost of finalising a property settlement is also likely to increase, given that valuations of capital gains on businesses, shares and investment properties will need to be obtained. 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.