Capital Gains Tax: A blunt instrument or sharp scalpel?

Proposals by the Tax Working Group, chaired by Sir Michael Cullen, will now be considered by the Government. Photo / File

COMMENT: In just the few days since the proposed CGT plan was released by the Tax Working Group, I've read more than 20 news articles and opinion pieces on why it could be a good or bad thing for New Zealand.

MORE: Peter Beck slams Capital Gains Tax, but other entrepreneurs see positives

What struck me was that more than 90 per cent of these articles focused on the impact it would have on housing and property investment.

But what I'm concerned about is the impact a proposed all-encompassing CGT could have on the New Zealand tech, high growth, and startup sectors.

It seems to me this broad brush approach to CGT could wipe out the great progress being made around the NZ entrepreneurial ecosystem over the last decade.

Starting a company can be a pretty daunting experience. A rollercoaster ride that often involves:

• leaving a safe and stable career.
• paying yourself nothing to start with and then generally below market rate as you re-invest as much as possible back into the company and hire people to join the cause.
• making sacrifices in your personal life and your mental health with the all-consuming nature of building a company.

The failure rate for new businesses is high, with 75 per cent of venture-backed startups likely to fail. But if successful, the high risk is met with a high reward.

Therefore, the ratio needs to be right in order to convince people to take the chance and take on all that risk.

So what would happen when suddenly the "reward" part of that ratio is reduced by 33 per cent?

This doesn't seem like a great way to convince people to start a company and won't help New Zealand make its mark on the world stage, encourage entrepreneurs to come here, or improve our productivity and exports.

Encouraging people to start companies has many positive flow-on effects for the economy and the public — particularly companies that export products and services that bring foreign money into NZ.

From a productivity perspective, startup companies are responsible for significant job creation (and the income tax that goes along with it), skills and experience creation, and payment of GST and companies tax.

And when the risk payoff is successful, the rewards can be used to reinvest in new companies and people (like Sam Morgan from TradeMe, or Hadleigh Ford from SwipedOn).

And those who are part of the ride go on to also invest in others, start their own companies, or use their knowledge and experience to help others get closer to obtaining successful outcomes.

Sir Stephen Tindall has invested more than $150 million into startups and early-stage ventures, and given more than $130m to community and environmental initiatives.

Arguably, Sir Stephen's allocation of resource has created 10-fold more value to New Zealand than if a third of his capital gains went to the Government.

This cycle is critical if New Zealand wants to be successful at improving our economic growth, reducing unemployment, and increasing spend on R&D. The creation of jobs, IP, and experience, can help NZ be a leader on the global stage.

If the Government is trying to fix the problems around housing, land, and property, they should ensure they are using the right tool for the right job.

The CGT as it's proposed appears to be a blunt instrument to be used where a scalpel would be better employed to fix the problem.

The scalpel would be to extend a CGT to cover non-productive land/property assets without negatively impacting on Kiwis creating productive assets, like new businesses and technologies.

But as it's currently written, it completely skews the risk/reward ratio that may have serious consequences for high growth startups and the NZ economy.

This also appears to be the views of the dissenting members of the Tax Working Group led by Robin Oliver (considered one of NZ's best tax policy thinkers) in a memorandum to the TWG's Final Report.

I'm all for finding ways to make NZ a better and fairer country to live in. And new taxes or other legislation may be key components to make this happen.

But as a founder, the proposed CGT doesn't feel very encouraging for new businesses and innovation.

So I hope any new CGT doesn't stifle Kiwi innovation, because as Peter Beck has already succinctly put it: "NZ already has big problems around creating large valuable technology companies and this will not help."

- Phil Thomson is a co-founder and co-CEO of NZ startup Auror, a retail crime intelligence software platform.