'Selective' explanation of capital gains tax

Official explanations of how the proposed capital gains tax regime for foreign shareholdings will work have given only a partial and selective account of what would trigger having to pay the tax.

Selling the shares and bringing the proceeds back to New Zealand was one scenario that would require payment of tax on any capital gains carried forward, but it was far from being the only one, a spokesman for Finance Minister Michael Cullen confirmed yesterday.

In fact, if an investor sells the shares and does anything with the proceeds except reinvest them in other shares, he or she will face a tax bill.

This is not the impression created by previous explanations of the regime - or by the legislation's explanatory note, a plain English preamble to the bill.

The new regime taxes 85 per cent of the rise in value of an investor's portfolio of non-Australasian shares, provided it originally cost more than $50,000 and is still worth more.

But the amount taxable in any one year is capped at 5 per cent of the market value at the start of the year. Any gain above that cap is carried forward.

There is also "rollover relief", which was explained in these terms when the policy was announced on April 11:

"The rules will also allow investors to sell one offshore asset and purchase another without being taxed in that year on any carried forward gains. This means that cash received from selling offshore assets will not trigger a tax liability unless the proceeds are brought back to New Zealand".

It added that there would be no taxation of any carried forward gains on the death of an investor.

An accompanying question and answer release said:

Q: Will any excess capital gains be taxed?

A: Yes. When the portfolio is sold and the proceeds brought back to New Zealand 85 per cent of the excess gains will be taxed. This treatment brings the taxation of direct investment income closer to that of investments in managed funds.

And the explanatory note at the front of the tax bill itself says: "For individuals gains in excess of 5 per cent will receive rollover relief until the finds are repatriated to New Zealand."

However, in response to queries from the Herald, prompted by a vigilant reader, Cullen's office is now saying: "The smoothed market value method (or 5 per cent cap) taxes 85 per cent of carried forward gains when the taxpayer sells the offshore investment and does not reinvest the proceeds (in the same year) in another offshore asset that is subject to the rules. The most common way this could occur is if the investor sells the offshore asset and reinvests the money in NZ - in other words 'repatriates' the money."

A spokesman for Cullen said: "If you sell a share and do not reinvest the proceeds in the same year in another share you are liable to the new capital gains tax. Therefore, if you invest [the proceeds] in any other asset offshore you will be liable."

He said the commentary to the bill was "merely a summary and should not be relied on for an accurate interpretation of every clause in the legislation".