Federated Farmers Manager General Policy, Nick Clark takes a look at what a capital gains tax could mean for New Zealand's farmers.
Like a ship negotiating choppy waters New Zealand is edging its way closer to a capital gains tax. What is it looking like and what will it mean?
With last year's change in government, it was no surprise to see it included in the work programme of a Tax Working Group, chaired by former Finance Minister Sir Michael Cullen. The Government currently proposes to take a capital gains tax proposal to the next election – it will not be effective before then.
The one limitation placed on the TWG was that a capital gains tax must not apply to the family home. This reduces (but doesn't eliminate) the risk of voter backlash, but it also reduces a capital gains tax's potential to address problems such as housing affordability, inequality, and the tax advantage enjoyed by owner occupier housing compared to other investments. It would also mean it raises less revenue.
Although the TWG has had a wide range of issues to consider, it is clear capital gains tax has been its biggest area of focus. This is not surprising given the politics involved.
Read more from Federated Farmers here.
When the TWG issued its interim report in September, a number of issues were rightly kicked to the curb, including land tax, changes to GST, and progressive company tax. This enables the TWG to focus its remaining time until February on the outstanding issues, particularly 'extending the taxation of capital income' – to give capital gains tax its policy-speak jargon.
The interim report of the Tax Working Group focused on a realisation-based capital gains tax on land, buildings and other fixed assets, company shares and even business goodwill. It gave some detail, but a lot was left open for further work.
A huge problem with the proposed approach is that on introduction there would be a 'valuation day' where all assets in the tax net would have to be valued with tax paid on the gains from sale against the 'valuation day' valuations.
This 'valuation day' approach would be very costly and complicated, although great for valuers and tax advisors. The other approach would be to apply the capital gains tax to assets acquired after its introduction. This would involve significantly less compliance costs.
There is also potential for a capital gains tax to result in asset 'lock-in', where asset owners could hold off from selling because of fear of the resulting tax liability, even if it would otherwise be in their best interests (and perhaps even the economy's) for them to sell.
To prevent lock-in there would need to be 'rollover relief'. If rollover relief is given for a 'similar asset swap', a farmer who sells their existing farm and purchases a new farm would not pay tax on any gain in the value of their existing farm.
Instead, the new farm would take the cost base of the initial farm so that if the new farm is later sold, the whole gain, including the gain from the initial farm, is taxed. The gain is said to be 'rolled-over' from the initial sale. This would be good for 'stepping-stone' farmers.
If capital gains tax is to be imposed upon us, then at the minimum it should be on realisation of the asset and the valuation day approach should be dropped in favour of an approach where the tax would only apply to assets acquired after the introduction date.
There should also be rollover relief to cater for trading-up and intergenerational succession.
But even with these measures Federated Farmers still thinks that capital gains tax is a dog.
We have submitted that it will make our well-regarded tax system more complex, it will impose hefty costs, both in compliance for taxpayers and in administration for Inland Revenue.
The herd scheme could not continue in its present form and there are issues with farm improvements and orchards. Federated Farmers is keen for further engagement with the Tax Working Group on these issues.
More generally, a capital gains tax will not solve housing affordability, it will not raise as much money as hoped, and it will have a harmful impact on retirement savings through, for example, heavily taxing KiwiSaver returns.
Overall, better to turn the ship around and send it back where it came from.