CGT gaining favour

A broad-based capital gains tax is getting support from unexpected sources in the business community amid confusion over the existing tax system.

The Tax Working Group headed by Sir Michael Cullen is widely expected to recommend a broad-based capital gains tax (CGT) when it publishes its recommendations on tax reform in September.

Much of the argument up to now has been over the uncertain impact that a CGT could have on house prices and rents.

But a CGT would also mean more tax being paid by sharemarket investors and entrepreneurs, PWC tax expert and Tax Working Group member Geof Nightingale agreed.

Inland Revenue spokesman Baden Campbell said it was not common practice for entrepreneurs to pay tax on any capital gain when they sold shares in their businesses ‘‘since in most cases the shares were originally acquired with the intention of developing the company, not selling it’’.

But that could change depending on the Tax Working Group’s recommendations.

The NZX and organisations representing investors in start-ups have so far chosen not to put up a fight against a broader CGT.

The stock exchange was not among the 6700 organisations and individuals that made submissions to the working group, choosing instead to keep its powder dry.

NZX spokeswoman Hannah Lynch said it would likely make a submission in future rounds of consultation.

The Venture Capital Association sat on the fence in its submission, while saying that if a broader CGT was introduced it should be ‘‘competitive internationally and particularly with Australia’’.

Angel Association board member Marcel van den Assum said it would welcome a full and balanced CGT on shares and property.

That was because the change could divert money from property investments, which were rarely taxed, into equity investments which were sometimes taxed.

‘‘We see this positively,’’ he said. Van den Assum – who is also chairman of Flick Electric and a former chief information officer at Fonterra – said many angel investors took a ‘‘conservative approach’’ and paid tax on their profitable investments, while others did not.

‘‘People interpret this their own way – are you investing in a capital account or a revenue account? – the definition is murky and getting clarity on that would be useful.’’

But if angels paid tax on their profits they should be able to offset their losses, he said.

Nightingale said he had quite a bit of indirect involvement with angel investors and ‘‘all of them worry about whether they have got it right’’.

‘‘Because it is ‘grey’ it puts people under stress, because they don’t know clearly what the rules are.’’

Perhaps partly because of this, opposition to a CGT in submissions received by the working group had been ‘‘muted’’, he said.

Businessnz said in its submission to the working group that it did not have a formal position on a CGT, as it would depend on the detail of what was proposed.

But it suggested that if a broad CGT was introduced it should tax the profit on the sale of family homes, which is something that the Government has said the working group cannot consider.

‘‘Once a tax is eroded by exclusions, its effectiveness in terms of efficiency and revenue collection is called into question,’’ it said. New Zealand’s economy could be entering a ‘‘danger zone’’, economists warn, in which a weak start to the year feeds falling business confidence, which could see the economy lose momentum throughout 2018.

On Thursday Statistics New Zealand will release economic growth figures for the first three months of 2018 expected to show the economy expanded by around 0.5 per cent. Three of New Zealand’s four largest banks are tipping 0.4 per cent growth.

If the figures turn out to be correct, annual growth would have slowed to around 2.6 per cent, the slowest rate of annual expansion since 2014.

While a bounce-back in the current, June 30-ending quarter, is likely, economists are increasingly warning of a loss of momentum.

‘‘We have been warning for some time of the likelihood of a soft patch in growth over the first half of this year, as uncertainty around the new Government’s policies weighs on firms’ expansion plans and households’ willingness to spend,’’ Westpac senior economist Michael Gordon said.

‘‘A lift in government spending will help to support growth, but this is more of a prospect for next year’s growth rate.’’

Westpac expects Thursday’s figures to show 0.4 per cent expansion, well below Treasury and the Reserve Bank’s 0.7 per cent prediction.

Weaker-than-expected growth ‘‘would put some pressure on the Government’s revenue and spending projections, and would reinforce the message that official cash rate hikes are quite a way off,’’ Gordon said.

Since September and the general election, headline business confidence has fallen sharply. While the ‘‘own activity’’ measure – which asks individual businesses how they are performing – held up initially, the figure has drifted lower in early 2018.