Investors fear chilling effect
Including all businesses, commercial land and buildings, and farms in the proposed extension of the capital gains tax regime is shaping up as the political sharp end of the battle that will occur over the next nine weeks as the government settles its position on today's final recommendations from the Tax Working Group.
A minority report from three of the 11-strong TWG, including the former deputy commissioner of Inland Revenue, Robin Oliver, supported only the extension of the regime to cover residential investment rental properties, saying they believed "administration costs, complexity and investment distortions that will result from the rules would outweigh the revenues that could be gained from a comprehensive capital gains tax as proposed, and it would not significantly reduce over-investment in housing or increase tax fairness".
"The minority group considers that a more limited capital gains tax could be appropriate if focused on rented residential property where most revenue could be raised."
New Zealand First is also expected to oppose capital gains tax on the proceeds of sale of small and medium-sized New Zealand-owned businesses and its leader, Winston Peters, vowed yesterday that NZ First would not allow the tax to apply to the sale of the family farm. Finance Minister Grant Robertson said today that the government would consult with NZ First and the Greens and announce policy decisions by the end of April, some nine weeks off.
It remains to be seen whether the TWG's recommendation that a farm sale as part of an inheritance - a so-called 'rollover' to the next generation of family owners - would not be taxed is sufficient to placate NZ First, which has billed itself a "no new taxes" party.
"The minority group considers that a more limited capital gains tax could be appropriate if focused on rented residential property where most revenue could be raised," said the report from lobby group Business New Zealand chief executive Kirk Hope, legal firm Bell Gully tax partner Joanne Hodge and Oliver, a pioneer of mid-1980s tax reforms who left the IRD in 2011.
The tax accountant on the group, PwC's Geof Nightingale, was among the eight members to stand behind the recommendations from the group chaired by former Labour Finance Minister Michael Cullen.
However, other tax and legal professionals were quick to zero in on the breadth of the recommendations from a report which, itself, acknowledges both that the cost of capital will rise for small and medium-sized New Zealand businesses if gains on their eventual sale are taxed and that there is a sliding scale of complexity in which adding residential investment property to the capital tax net is the easiest.
David Snell, a tax partner at the New Zealand arm of global accounting firm EY, warned that, as "a tax on transactions with very limited roll-over relief", such a regime would "present real concerns for private equity, venture capital, listed property trusts and companies engaged in the disposal and acquisition of assets”.
The Tax Working Group's final recommendations to include not only residential investment property but all commercial enterprises, land, buildings, and farms in the proposed extension of the capital gains tax regime are shaping up as the key political issue and negotiating point between the governing parties.
The TWG report itself acknowledges a sliding scale of possible outcomes, in which there is "a clear case" for taxing gains on the sale of residential investment property, while "at the other end of the spectrum there will be greater complexity regarding the treatment of corporate groups, unlisted shares and business goodwill".
Listed shares, land-based businesses and commercial property were "in the middle of the spectrum".
The report itself acknowledges that "taxing domestic investors on the gains from their shares would increase the cost of equity capital for these types of companies and could reduce investment".
Finance and Revenue Ministers Grant Robertson and Stuart Nash said in a statement that it was "highly unlikely all recommendations will need to be implemented", although Robertson said that partly reflected the breadth of recommendations, which go into other areas of the tax system, including environmental and so-called 'sin' taxes, treatment of trusts and charities, and the tax status of the New Zealand Superannuation Fund.
The minority group also opposed a capital gains tax on business assets, saying it would "discourage investment and innovation and tend to lock businesses into current asset holdings and lead to double taxation.
"Concerns with the ‘valuation day’ approach (taxing growth in the value of assets from the proposed commencement date of 1 April 2021) include its vulnerability to conflicting valuations of assets," the minority said, although the TWG recommendations propose a five-year window for valuation to be undertaken and that various options should be offered.
The group appears to acknowledge that business owners are likely to cherry-pick their valuation methodology from several options, warning that "some taxpayers might choose the highest valuation possible and not necessarily the most reliable".
Robertson said a public consultation would follow April's policy decisions, and only then would legislation be introduced to Parliament with the "intention" that new law be in place for implementation in the year after the 2020 election.
Cullen suggested today the government would struggle to meet its timetable, may need to call in help from other governments with stricter capital tax regimes, and that a staggered approach or implementation in 2022 were possibilities.
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