Capital gains tax not supported by business

22 Feb 2019

I was a member of the Tax Working Group as a representative of business.  I appreciated being able to contribute to informed and frank debate with a thoughtful intelligent group of New Zealanders over the introduction of a capital gains tax.

From a business perspective I’m not able to support the group’s recommendations.

Along with two other members of the group who are tax practitioners, I have concerns about how a capital gains tax as proposed would affect business and economic growth.

The terms of reference of the Tax Working Group excluded the family home from any capital tax for understandable reasons: taxing the capital gain on the most significant asset of most families would reduce their financial security and investment options.

However, removing the family home from the capital gains net means the tax would therefore fall mainly on business, reducing the financial strength and investment options of the business sector.

Businesses in New Zealand already face a higher corporate tax rate with fewer exemptions than businesses in many other countries.  An additional tax burden would not help businesses grow and create jobs for New Zealanders.

I don’t believe a capital gains tax should be imposed on either homes or businesses.

Taxing capital is not a useful move for a country with a very shallow capital pool. A key barrier to business growth is the difficulty of raising capital for investment within New Zealand and our consequent reliance on overseas investment.

Our tax settings should encourage capital growth - to enable jobs and economic growth - not discourage it.

New Zealand’s current tax system is relatively simple and efficient, beneficial for doing business.  It would be a pity to lose this benefit by adding the complications of a capital gains tax.

These are some of the main reasons why business would not support a capital gains tax.

There are other details in the Tax Working Group’s proposals that would bring problems for the productive sector.

Taxing capital gain when an asset is sold would create a disincentive for the sale of businesses.  Selling a business realises value that allows new businesses to develop, so it would diminish new business development and make the general business environment slower and more static.

It would tend to lock businesses into their current asset holdings, reducing options for future development.  We could expect to see less business development and innovation generally.

Taxing capital gains in business assets could be complex.  Under a proposed ‘valuation day’ approach, the tax could be applied to the growth in the value of assets from 1 April 2021 (the date when the capital tax policy would be implemented) but this would be vulnerable to conflicting valuations of assets.

Valuers, accountants, lawyers and tax advisers would benefit from this complexity, but business overall would not.

Taxing both shares and business assets as proposed would compound the impact on business, creating double taxation and reducing the income of New Zealanders owning shares in New Zealand.

These are some of the issues that caused a minority view to be expressed within the Tax Working Group.

Our view is that business development, innovation, growth and jobs would be weakened if the capital gains tax proposals were implemented.