Fran O'Sullivan: Tax would hit farm values

Photo / Ross Setford

A capital gains tax would contribute to a long-term squeeze on the dairy sector

The introduction of a capital gains tax has long been a football in the political arena.

For the 2014 election, Labour has put capital gains on the table as a staple policy in their proposed tax regime.

We don't have much more than a philosophical outline from Labour about how that policy will work, but whatever its form it stands to have a material impact on farming.

The New Zealand Institute of Economic Research was commissioned by Federated Farmers to study the effects of a capital gains tax on New Zealand and the farming sector.

The NZIER's report says that although a capital gains tax would take time to ramp up, they estimate the immediate reduction in current farm values would be between 1 and 5 per cent -- or $2.4 billion to $7.6 billion in monetary terms.

That's a significant figure considering Labour expects to gain only $1.3 billion from the farming sector through the capital gains tax in the next 15 years. NZIER revised that figure to a paltry $590 million from their own analysis.

With the RBNZ putting dairy farmer debt at $32 billion, denting farm values stands to place a further long-term squeeze on the dairy sector. Implementing an effective tax on a group facing a less than promising outlook on the export front will place added stress on farmers.

NZIER's report says that the effective tax rates experienced by farmers are higher than other industries because of the capital intensity of the work.

About 75 per cent of value added in agriculture is from capital -- land, plant, equipment and machinery -- compared to an economy-wide average closer to 50 per cent.

In addition to being a revenue tool, the capital gains policy has the potential to see farmers hold on to their farms for longer in the face of declining asset values. Although Labour may view that as a positive consequence, the reality is that it has the potential to materially impact the exit options available to farmers.

Labour came out strongly against the report with shadow finance minister David Parker calling the release of the NZIER report part of an "an orchestrated attack" in co-ordination with the National Party which made public its own response to the capital gains tax on the same day.

Parker said that Labour's capital gains tax would make farms subject to the small-business exemption.

Under the clause, the first $250,000 of gains are tax-free if the seller is aged over 55 and has personally owned the business for more than 15 years.

Parker also called the NZIER report "plain wrong", saying "I wrote to NZIER showing errors in the report. Further errors have been identified by BERL overnight."

He said that the report mistakenly underestimates capital gains because it does not properly calculate all realised gains after the date or introduction of the tax.

Parker also doubted the validity of the work, with much of it being based on the effects of the Australia capital gains tax which taxes different portions at different rates.

He called on NZIER and Federated Farmers to admit their errors and print a correction. But NZIER is holding its ground.

The institute says it has double-checked its numbers against Parker's claims and stands by its report.

A capital gains tax will be a certainty if the government changes and farmers will need to factor its impact into their planning. Pity that there is no consensus on that impact ahead of the Saturday election.

• Fran O'Sullivan is a business columnist for the NZ Herald and Alexander Speirs (right) is a business journalist for Herald Business Reports.