Taxing capital gains would be body blow to Kiwi business owners
The Tax Working Group’s (TWG) final report will have left many Kiwi business owners feeling less than impressed if recommendations to implement a Capital Gains Tax (CGT) across all assets are taken on board by the Government.
Alongside an increase in tax on the sale of residential rental properties, which received unanimous support from the group, the support of “going further and broadening that approach to include all land and buildings, business assets, intangible property and shares”, was voted in favour by a margin of 8-3.
It’s disappointing that the group has chosen to lump all assets under one category for a CGT, even while acknowledging the underinvestment in business and the overinvestment in property.
Unlike the unanimous vote for residential rental properties, it’s clear that even the experts can’t agree on the taxation of businesses and other assets.
If the suggested CGT is introduced, this will propel New Zealand to the third highest level of CGT in the world — from our current starting point of zero. The impact this will have on business investment decisions in New Zealand cannot be underestimated.
Hitting small business
Countless Kiwi businesses are already in the hands of baby boomers who need to sell — many of whom have spent a lifetime building up an asset for retirement. Owners will be punitively punished for their efforts, hard work, years of risk and for providing employment.
New Zealand-operated businesses are a productive asset for the country. With over 480,000 SMEs accounting for 97 per cent of businesses in New Zealand, it’s a sector that employs a third of the nation’s workforce.
If the success of growth resulted in more tax, naturally, small business owners will be significantly discouraged from growing their business.
This will in turn increase the likelihood of an owner holding on to their income-generating business, rather than selling to a buyer who is willing to develop it, limiting growth employment opportunities, threatening further export of goods and services, decreasing investment in resources that drive growth, and diminishing intellectual property development — just to name a few.
Stifling growth
It’s bizarre that the group sees no case to reduce the tax rate or introduce a progressive scale for companies. However, it is recommending measures to help businesses to grow, be more productive and lower what they spend complying with our tax rules.
Why would the Government lower spending on compliance and then introduce valuations, new taxation and a complicated structure for partial asset rollovers as proposed?
Rather than offering a capital gains-free threshold for smaller businesses, the Group has proposed to provide a $500,000 tax-free
Unlike the unanimous vote for residential rental properties, it’s clear that even the experts can’t agree on the taxation of businesses and other assets.
component to businesses with a turnover of under $5 million. How has this been practically measured? Why would a business want to grow beyond $5m if they will be penalised?
Marginal tax rates
The proposal to tax capital gains at marginal tax rates is staggering, and shows the group clearly has no concept of risk and reward.
There is a stark difference between risk that comes with a standard PAYE job or from owning a property which has the associated ability to leverage, versus the risk of starting or owning and running a business, coupled with the difficulty of leveraging against it. Yet, the group is wanting to tax the reward to the same extent.
Forget what this will do to the growth of businesses; this will actively deter Kiwis from starting businesses at all. As a nation priding itself on Kiwi ingenuity, we should be encouraging entrepreneurialism, not hindering it.
Asset class spectrum
It is encouraging, however, to see within the group’s summary assessment that it has provided recommendations to distinguish between the different asset classes.
The TWG breakdown of asset classes includes:
● Residential rental investment properties
● Listed shares, land-based businesses and commercial property
● Corporate groups, unlisted shares and business goodwill.
If the Government chooses to extend the tax to only some asset classes, this may mean businesses will be exempt.
This will not hinder the revenue forecast by the proposed taxation of capital gains either, as the tax take from business goodwill sales will be so minimal.
Aaron Toresen is managing director
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and Suneil Connor chief financial officer at business brokerage LINK.