Most Read Contributor in New Zealand, September 2016
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
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
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
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%
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
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).