CTG death, gift duty by stealth

17/07/2011

Labour says its proposed capital gains tax won’t be imposed on the family home or farm homesteads.

But there is a proviso – the area used for business will be liable for the tax.

I don’t know of any farmhouse which isn’t used for business, though just where the line between farm and home is crossed could be debatable.

If a farmer has a bright idea in the bath, or lies awake counting sheep would the bathroom and bedroom be considered part of the business or home?

Farms aren’t the only businesses to be run, at least in part, from home and they too will be hit by the proposed CGT.

Of equal concern is that the tax would effectively reintroduce death duties:

Under proposals unveiled by Phil Goff this week, assets passed on to children would not create an immediate capital gains tax liability. However, Ernst & Young tax partner Jo Doolan said when the assets were eventually sold, the new owner’s liability would be based on the value of assets when it was originally bought, not the value when the asset was inherited.

“Essentially it’s a back-door estate-duty-type tax that’s coming back in” if Labour was elected, Ms Doolan said.

“They’re saying it will only impact on a small percentage of New Zealand, but most New Zealanders, at some stage, will inherit a property or some other assets, and the minute they sell, they are taxed at the original cost.”

Death duties caused lots of work for lawyers and accountants and imposed costs which threatened businesses. Reintroducing them, albeit by stealth as a CGT, would be a backward move.

Wairarapa sheep and beef farmer Anders Crofoot described the tax as “death duty by stealth”.

Mr Crofoot said because of the asset-heavy nature of farming, the industry would be hit harder than other types of small business by capital gains tax, where less capital investment was required.

“If you’re going to whack 15 per cent off that every time it changes hands, it makes that very difficult.”

Mr Crofoot said he believed that in theory capital gains tax could be fair, but once exemptions for different types of assets were introduced, it created a new supporting industry for lawyers and accountants to advise clients on ways to avoid the tax.

CTG in theory isn’t all bad, but Labour’s complicated one is a dogs breakfast which disincentivises business success and directs energy to avoidance.

Every minute of business time wasted on trying to minimise tax liability is a minute not devoted to productive, wealth generating activities.

John Shewan, the chairman of PricewaterhouseCoopers, said the proposals were “manna from heaven” for accountants, predicting a vast body of work for financial planners to advise wealthy clients on how to navigate through the exemptions.

“We’re recruiting, we’re going to triple our staff,” he quipped.

“But in all seriousness, as an overall tax, while there are definitely pros and cons for a capital gains tax, this one is extremely complicated. It’s got some amazing features which I think really bring it down under its own weight.”

A clean capital gains tax with no exemptions, balanced by reductions in other taxes, might have a place.

But Labour’s proposal is for a dirty tax, complicated by exemptions and one which reintroduces death and gift duty by stealth.


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