COMMENT:

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 is taken on board by the Government.

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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.

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It's disappointing that the Group has chosen to lump all assets under one category for a CGT, even whilst 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.

Kiwi businesses discouraged from changing hands

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 business 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 owners holding onto their income-generating businesses, 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 IP development – just to name a few.

Tax-free component will stifle 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 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 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 to leverage against it. Yet, the Group is wanting to tax the reward the same.

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.

The 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 include:

1. residential rental investment properties;
2. listed shares, land-based businesses and commercial property,
3. 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 forecasted 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 at LINK and Suneil Connor is chief financial officer at LINK.