2019 M&A Forecast - Tax impacts on the horizon

The New Zealand tax landscape continues to evolve, and will be an important consideration in M&A activity in 2019. There are a number of changes ahead, with wide ranging ramifications, if the Government’s Tax Working Group recommendations are actioned.

Capital gains tax – will we, or won’t we?

Currently, New Zealand does not have a general capital gains tax, and only taxes some gains on some assets. The Tax Working Group is examining whether New Zealand should implement a general capital gains tax.

We think it is likely that:

  • the Tax Working Group will recommend a general capital gains tax for New Zealand in its final report due in February 2019; and
  • the Government will move to introduce a general capital gains tax regime, timed to take effect after the 2020 election.

Given the Government has promised that a capital gains tax would only take effect after the next General Election, the voting public will have the final say on whether New Zealand should proceed with a capital gains tax.

Our best advice for investors is to proceed on the basis that there is a significant risk of a general capital gains tax after the next election, and if implemented:

  • this tax will apply generally to equity interests, land and intangible property such as goodwill; and
  • existing asset holdings will be caught. A concessionary step-up in cost base should be allowed for existing asset holdings, but this may require businesses to revalue all of their assets – for many taxpayers this will be a time consuming and costly exercise.

The risk of capital gains tax should be factored into asset pricing and investment decisions in 2019.

Base erosion and profit shifting – counter measures continue to bite

For inbound investors, anti-“base erosion and profit shifting” rules passed in 2018 will continue to challenge in 2019. The rules include:

  • amended interest limitation rules that impact the amount of debt and the return on debt recognised as deductible for tax;
  • • amended transfer pricing rules focussing on the substance of cross border arrangements rather than their legal form; and
  • a new anti-“hybrids” regime targeting “hybrid” instruments and entities.

The net effect of these changes will see certain foreign investors facing higher effective tax rates on their New Zealand investments. Any foreign investor seeking to invest in New Zealand needs to pay close attention to these rules, which are complex and still bedding in.

"Our best advice for investors is to proceed on the basis that there is a significant risk of a general capital gains tax after the next election."

Who can help