Distinguishing between taxable and non-taxable gains from the sale of shares is notoriously difficult, as the large body of case law in this area attests.
So perhaps our Government should follow Singapore’s lead and remove some of the uncertainty by exempting from tax certain share sale gains?
Singapore’s regime similar to ours
Like New Zealand, Singapore is in a small minority of developed countries that do not tax capital gains. And Singapore relies on the same factors to distinguish between revenue and capital gains as we do.
The test for distinguishing between revenue and capital gains creates uncertainty. Recognising that this reduces Singapore’s attractiveness as a business location and increases compliance costs, the Singaporean Government has announced that it will legislate to exempt from tax certain share sale gains.
The proposed exemption
The exemption will apply to gains made by a company from the sale of ordinary voting shares where, at the time of the sale, the seller has held at least 20% of the ordinary voting shares in the relevant company for a continuous period of at least 24 months.
It will apply to shares in both domestic and foreign companies. It will not apply to gains made by insurance companies, or to sales of shares in unlisted companies which are in the business of trading or holding land in Singapore.
Generously, the ability to deduct losses from such sales is not affected. Nor is there any negative implication that a gain which is outside the terms of the exemption is necessarily on revenue account.
Would it work in New Zealand?
Yes, and it would also be consistent with steps that have already been taken.
- Gains made by PIEs from the sale of New Zealand and listed Australian share investments are already tax-exempt. However, PIEs cannot hold more than 20% of the voting interests in a single company.
- Gains made from most foreign portfolio investments are subject to the fair dividend rate (FDR) method in the FIF regime, which taxes a deemed dividend return of 5% of the opening market value of the investments each year, but not the capital gain.
Accordingly, the only significant types of equity investment which are still truly governed by the uncertain case law tests are investments by non-PIE investors (such as individuals or private equity funds) into companies which are:
- New Zealand resident
- Australian listed, or non-listed if it is more than a 10% investment, or
- resident outside Australasia, if the investment is not a FIF interest for the shareholder (or where the shareholder uses the attributed income method to calculate their FIF income).
Chapman Tripp comment
The Government’s decision in 2010 not to introduce a capital gains tax was based at least in part on the fact that the relative equality between the corporate rate and the top marginal rate means that, for New Zealand companies at least, corporate income is already adequately taxed without having to impose a capital gains tax on shares.
An exemption along Singapore lines would give taxpayers some certainty of outcome, rather than having to hope that their own views on whether gains are on capital account are shared by the Inland Revenue.