New Zealand’s Tax Working Group has released its final report on the ‘Future of Tax’, which recommends an extensive capital gains tax regime. Unlike many other countries, New Zealand currently has virtually no capital gains taxes. The proposed tax is not confined to land and buildings. ‘Intangible property’ is among the many assets targeted for this tax. The Working Group defines ‘intangible property’ as including ‘goodwill intellectual property such as patents, trade marks and copyrights, and software’, among other assets. The tax rate will be 33% for most assets.
Political and economic commentators have rubbished the chances of such an extensive capital gains tax coming into effect, calling the report ‘dead on arrival’ or ‘likely to go the way of the Titanic’, but it is not beyond the realms of possibility that a capital gains tax could be implemented for selected classes of business assets in a piecemeal fashion.
Assets that already exist at the time any capital gains tax comes into force will have to be valued. As is well known, the valuation of intellectual property (IP) is difficult and somewhat inexact. If this class of assets does become subject to a gains tax, there will be a massive escalation of IP audits and valuations inundating the workloads of IP lawyers and accountants in New Zealand.
What is the initial capital value of copyright when an author has finished writing a book compared to when he or she assigns the copyright to a publisher? Can there be a gain in the value of the copyright in this situation? Similarly, when an inventor patents an invention and assigns the patent to a company after one year of trying to do so.
The Tax Working Group seems to have entirely overlooked an existing provision in the Income Tax Act 2007. Section CB 30 already makes the proceeds of the sale of patent rights taxable income. Surely they are not proposing double taxation!
Unless certain misconceptions of the Tax Working Group are ironed out, when and if a capital gains tax is implemented for intangible property there will be fundamental legal arguments whether some intangible assets are property at all. The Tax Working Group thought intangible property was a chose in action, namely something that can only be claimed in an action in court. But some intangibles are not legal rights and therefore cannot be choses in action—for example, software. Yet, the Tax Working Group gave software as an example of ‘depreciable property’. Not only did the High Court in Erris Promotions v Commissioner of Revenue (2004) specifically find that software was not depreciable property in New Zealand, no court in New Zealand, Australia or the United Kingdom has expressly held software to constitute personal property full stop.
Patents were also considered by the Tax Working Group as appropriate assets to be subject to capital gains tax by virtue of being choses in action. But patents were dropped from that category in the UK Patents Act 1977 and similarly in the New Zealand Patents Act 2013. In both countries, patents are personal property, but no longer choses in action.
There is some good news—for non-resident owners of New Zealand IP. One of the concessions made by the Tax Working Group is that non-residents should not be taxed on the realization of any New Zealand intangible property (or company shares) which they hold.
The Government’s full response to the report is expected in April 2019.An edited version of this article was first published in the National Business Review on 1 March 2019.