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

  • this tax will apply generally to equity interests,
    land and intangible property such as goodwill;
  • 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