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.


Fed Farmers win battle against envy tax

02/11/2010

Federated farmers has finally won its 42 year battle against gift duty.

Federated Farmers is applauding the Government’s decision to abolish the arcane gift duty tax.  The decision will help ‘save our farms’ by smoothing farm succession.

“News the Revenue Minister, the Hon Peter Dunne, intends to abolish Gift Duty is the best I’ve heard in very a long while,” says Philip York, Federated Farmers economics and commerce spokesperson.

“Abolishing Gift Duty has been one of the longest held policy objectives of Federated Farmers.

“It’s been something like a 42 year slog for us against this envy tax.  While Government deserves a bouquet for this, so to do all of our staff and elected members who over decades, have kept the pressure on.

“Because it can take decades to gift a farm from parents to their children, farm succession, rather than land prices, is a major factor if we are to farm for generations.

“Yet Gift Duty itself is one example of poor regulation we’d avoid if we had a Regulatory Responsibility Bill in place.

“After the costs of administering it were deducted, Gift Duty only brought in around $750,000 a year.  But it made taxpayers spend $70 million a year on lawyers and accountants to get around it, as long as time was on their side.”

Gift duty should have been abolished when death duty was. Since it wasn’t people went to great lengths and expense to get round it.

Farmers weren’t the only ones who came up against it, but the value of land meant it was especially difficult for them in succession planning.

This is a good win for Federated Farmers and a reminder of the important role they play in advocating for us.


Gift duty to go?

12/06/2010

Federated Farmers has been campaigning against gift duty for years and is welcoming the news that  it may go.

“Federated Farmers is extremely happy as we’ve lobbied successive Governments to end this arcane but avoidable tax, for those who have the means and time to restructure their affairs,” says Philip York, Federated Farmers economics and commerce spokesperson.

“The current gift duty threshold of $27,000 per annum means it can take decades to gift a farm from parents to their children. Succession is a major issue in farming today so the end of gift duty is a major step forward for Federated Farmers priority of farming for generations.

“In tragic circumstances gift duty greatly amplifies any sense of loss if affairs are not in order.  Unless gifted, for every $1 million up to $250,000 is payable to Inland Revenue.   

“Yet gift duty is easily avoided over time thanks to accountants and lawyers, so that makes gift duty not only inefficient, but punitive and pointless as well. . . “

The ODT reports that the amount collected doesn’t  justify the effort anyway:

The scheme cost $435,000 to administer each year, but generated just $1.5 million in duties.

A lot of people were escaping the tax by selling their assets at market value in exchange for a debt which they progressively wrote off without requiring repayment.

Feds describes gift duty as an “envy tax”. Getting rid of it will mean there’s no need for avoidance and make succession planning a bit easier for farming families.

Twenty seven thousand dollars may be a lot to someone who doesn’t have much but it’s less than the average wage. It would take decades to give away the value of even a small farm at no more than that amount each year.

Gift duty doesn’t  just apply to farmers or other business people, though. It applies to anyone, including Lotto winners who have to pay the tax if they want to share any more of their winnings than $27,000 annually.

The state shouldn’t be standing with its hand out between people who want to give away what they’ve earned or won and the recipients.


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