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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 34
What about personal use assets (e.g. boats and cars)?
o
Most CGTs exclude personal use assets (e.g. boats, cars)
o
The reason is that they generally fall in value – therefore, if such assets were not excluded, affluent taxpayers
could avoid the CGT by for example, buying a yacht (e.g. a taxpayer owns an office building, sells the building
at a profit and capital gain, but if they make capital losses by selling that yacht aſter it has fallen in value, they
can set the losses off against the capital gain and thereby reduce liability to CGT)
SCOPE OF THE TAX – RESIDENCE AND SOURCE
New Zealand’s tax system is based on the twin jurisdiconal pillars of residence and source
o
If you are resident in New Zealand, you pay income tax on worldwide income
o
If you are not resident in New Zealand, you only pay income tax on income derived from New Zealand
Assuming the income tax is going to connue to be based on both residence and source, it would make sense for a CGT
to have the same jurisdiconal scope
o
Residence – taxing New Zealand residents on their worldwide capital gains
o
Source – taxing non-residents on capital gains derived from New Zealand
To prevent tax avoidance, we have CFC and FIF rules to extend the scope of the tax system
o
The basic scope is residence and source
But it would be easy for a New Zealand resident to escape tax on offshore income by accumulang it
in a company incorporated in a tax haven
For example, you might own shares in an Irish company. The company pays dividends, which counts
as income. But you could incorporate a company in a tax haven (e.g. in Hong Kong), then transfer the
shares to the HK company, so that dividends are paid to the HK company. This escapes the scope of
the NZ tax system because the dividend is not derived from New Zealand (it is derived from Ireland),
and it is not the income of a New Zealand resident (it is the income of a HK resident)
o
The CFC (controlled foreign corporaon) rules address this issue
The New Zealand resident shareholder of the HK company is obliged to pay New Zealand tax on the
income of the HK company that is aributed to the New Zealand shareholder
The dividends are the income of the HK company, but they are aributed to the New Zealand
shareholder, so the New Zealand shareholder must pay tax
o
Therefore, if we are to have a CGT, we should have something similar – tax New Zealand residents on capital
gains accumulated in offshore companies
DOUBLE TAX TREATIES
OECD Model Tax Treaty, art 13 deals with capital gains:
1.
Gains made on the disposal of
immovable property
are taxable in the source state (and the residence state).
2.
Gains made on the disposal of a
PE’s assets
are taxable in the source state (and the residence state).
3.
Gains made on the disposal of
ships and aircraſt
are taxable only in the residence state.
4.
Gains made on the disposal of shares in a
land-rich company
(50% by value) are taxable in the source state (and the
residence state).
5.
Gains made on the disposal of any other property (most importantly,
shares
) are taxable only in the residence state.
This raises a number of issues because:
1.
The interpretaon of art 13 of the Model is in various respects debatable; and
2.
Some of New Zealand’s DTAs follow the Model, some don’t.
THE RATE OF TAX
What should be the rate of CGT – should capital gains be taxed at the maximum rate of income tax (39%)?
o
One argument is that you should tax capital gains at the same rate as income
If you tax capital gains at a lower rate than income tax, then to some degree you fail to achieve equity
and efficiency (which are the two basic objecves of CGT)
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