Tax may raid the home front

Ed Schuck says that when you have your own business you eat what you kill. Photo / Janna Dixon

A Labour Party plan to charge capital gains tax on businesses operating out of residential properties could affect people with a home office.

If a business owner works from home, when the property is sold they will have to pay 15 per cent capital gains tax on the part of the residence used for running the firm, Labour says.

Associate finance spokesman David Parker said the idea was to capture businesses such as motels, where only part of the property was residential.

But he agreed that the rule could be extended to people such as a consultant who worked out of a spare room. Tax experts would need to clarify that. "The principle behind it is if you're claiming expenses [for working from home] you can hardly say that's not a business asset.

"You do need to have a rule around that, otherwise it would be unfair."

The proposal is contained in the party's taxation policy made public earlier this month. But it appears to have gone largely unnoticed.

Ernst & Young tax partner Jo Doolan said Labour had claimed that only a small proportion of New Zealanders would be impacted by capital gains tax, but because most firms employed fewer than five people many owner/operators could be affected.

"It's quite clear in [Labour's] document ... but they're hoping they can distract attention from it," Doolan said. "Let's not be sneaky about it and pretend it's not going to impact on a lot of people."

Small and medium enterprises (SMEs) could choose not to claim tax deductions for a home office, and would therefore avoid the capital gains tax. "Either way you're going to be paying more tax. We want our SMEs to grow and that's absolutely critical to the future. We can't afford to be hitting them."

Iain Craig, tax partner at Auckland accountancy firm BDO, hoped "commonsense would prevail" if Labour came to power.

The costs of a home office were things like furniture, computers, internet access and some insurance and rates. "None of these are items that point to an asset that's being applied to derive a capital gain. You're almost renting the asset for use as a home office."

There would also be issues in policing it, defining the areas used for operating the business, and valuing those areas, Craig said. Many entrepreneurial companies kept costs low by working from home. "Why would you punish that efficiency? It's going to add a whole lot of compliance obligations for very little practical effect," Craig said.

BusinessNZ chief executive Phil O'Reilly described the proposed tax as "absolutely counterproductive". If a person owned a house for 10 years but ran a business from the home for only half that time, which part would be subject to the tax? "It just shows you the ridiculous nature of this proposal."

It would also lead to a great deal of lobbying from interest groups to get themselves excluded from the legislation, he said.

"That's another classic of sand in the wheels of the economy, where people are not arguing about how much business they should be doing but how much tax they should be paying."

Expert says unwelcome idea right move

Auckland investment consultant Ed Schuck isn't thrilled at the prospect of having to pay capital gains tax on his home office should he sell the family home.

However, "with my investment consulting hat on" it's actually the right idea, he says. Schuck went into business for himself two years ago and hasn't looked back. "When you have your own business you eat what you kill." While other SME owners may not share his views, he says there is a case for capital gains tax in the economy generally. "From a consistency point of view it wouldn't be fair ... for folks at home to get away with it."

He disagrees with the argument that small businesses don't set up a home office for capital gain and therefore the asset should not be applied to the tax base. "I don't think [any] businesses own property for the purposes of speculative gain."