CGT a game of snakes and ladders
Disclosures usually appear in fine print at the bottom of opinion pieces. Due to the size of this one, we should probably let it loose now.
I sold my business to a Belgian bank and made a tax-free capital gain.
This happened more than 10 years ago and yes, I appreciated how lucky I was.
That appreciation came from experience. The first time I benefited from the sale of a business, I was living in the UK and the company was sold to an Irish bank. The proceeds got pinged for tax and a good chunk was promptly donated to Her Majesty’s Revenue and Customs. Did it bother me? Not really, it was tax law and I knew the rules.
There is no way to enter the discussion on capital gains tax (CGT) without having some sort of conflict of interest and getting caned for it. Mine is that I support the introduction of CGT, yet I’ve benefited hugely from not paying it. I can now ‘‘afford’’ my opinion.
The real judgment is whether New Zealanders want to let people like me continue to benefit in the way we have. I’m happy to accept the generosity, but it’s worth noting the UK government didn’t temper my entrepreneurial urges and I coughed up.
CGT is a game of snakes and ladders. The Tax Working Group have dumped a big pile of snakes at Finance Minister Grant Robertson’s feet and now he needs to cull, shorten, simplify and add some ladders.
If this becomes an election issue, opposition to the idea must look woefully greedy. It also needs to be delivered in one simple sentence.
‘‘Two houses, a million bucks each and a discount’’ is an example. Exemptions would undoubtedly provide less money to redistribute to lower-income earners, but a longer-term view is needed.
Here’s how the political generosity would look:
1. Add more housing exemptions. Exempt one property per adult. It allows a couple to have a home, plus a bach or a rental. It’s generous, but are we really after the small Kiwi dream? Go and chase those with a proper rental portfolio.
2. Discount the tax on capital gains to 20 per cent. Current proposals would see most people paying a 33 per cent marginal rate on gains. Stop using the words ‘‘income is income is income’’. It isn’t. Wages, dividends, interest and rent are income. Those things are regular and less risky.
There is absolutely no reason to treat gains in share prices, houses and businesses under the income tax regime.
3. Kiwi business relief. Does it matter if you own 100 per cent of a small business or 10 per cent of a larger company? Why differentiate between those who farm cows or data? Chances are it’s your retirement plan and all business owners deserve a partial exemption. A lifetime retirement allowance could exempt $1 million in gains for those aged 65-plus. Extend this to any qualifying shareholder if they place up to $1m in capital gains in KiwiSaver over their life. They’ll think twice about that lock-up, but it appears generous.
We need CGT exemptions to focus on individuals and what they own, not the level of turnover of a company. It humanises money and makes it easier to judge fairness.
When Sam Morgan sold Trade Me he personally netted $227m. As a start-up most of it would be a capital gain. Do we mind if he received $1m tax-free and paid CGT on $226m? If a farm increased in value by $10m over 10 years, Mr. and Mrs. Farmer would each take $1m in gains tax-free when they sell, leaving the Government to tax the remaining $8m.
Older business owners, landlords and farmers already have large gains locked in which are untouchable. Providing more exemptions to the older age group lets them double-dip, but that’s a function of this not being retrospective.
4. KiwiSaver, managed funds and direct shares. The tangled snake pit. Taxation of PIEs, FIFs and direct shareholdings is no longer fit for purpose. There’s an unacceptable level of anomalies that investors can’t navigate. It’s so bad even fund managers threw their hands in the air when the Tax Working Group offered them the chance to tax only the realised gains of local Kiwi and Aussie shares. They want to use a more onerous method of taxing paper gains, because it’s an admin nightmare.
Seriously, Grant? When fund managers are turning down tax concessions available to direct investors, you’ve got a balls-up on your hands.
The next mutant snake swings between the CV tree and the 5 per cent cap on foreign shares. Whoops, a KiwiSaver manager can’t take advantage of that swing or the $50,000 de minimus exemption enjoyed by direct investors. Surely this one is headed for a lethal injection, because New Zealand and Aussie shares don’t have a 5 per cent cap on their gains.
Finally, there’s a tangle of ladders proposed for lower-income earners. Fiddling with PIR rates and employer contributions to name a couple. It’s all got so convoluted everyone’s lost track of which concession was the apology for which anomaly.
If we choose to apply CGT across the board it’s time for a re-write. All shares, local, foreign, inside a fund, or held directly should be taxed under one simple regime and treated identically. Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.
If we choose to apply CGT across the board it’s time for a re-write.