Farming: Capital gains tax rears its (ugly) head again
25 Jan 2019
Is there a farmer out there who would support the introduction of a comprehensive capital gains tax in New Zealand? Perhaps, but it is big ask.
A comprehensive capital gains tax is expected to be recommended to the coalition government within the next few weeks and become Labour Party policy before the next election. Implementation is planned for after the election. This gives it only a limited chance of success.
Politically, it is very much a Labour versus National issue, but amongst everyone else opinion may not necessarily be based around party lines.
In our work, we deal with the consequences of tax on investment every day and although we are not tax experts, we are well-briefed on the tax consequences of all the investment strategies we are involved with. It is the ‘after-tax’ returns that we are concerned with in our investment modelling.
It is obvious to us and our clients that shares and property don’t generally create a tax on capital gains, and this gives them an advantage over cash and bonds. But I believe it is a fair call to ask the question whether capital gains should be taxed, or not, like other forms of income.
Is it fair that my elderly client is taxed on all the gain she makes on her bank term deposits every year, all her life, whereas some farming clients, who in poor years don't always make much profit and therefore don't always have tax to pay, then doesn’t pay any tax on the growth in the value of their farm land when they sell it?
Many farmers, of course, pay a lot of income tax along the way as they consistently generate profits from their business.
Fairness? I acknowledge that the tax system won’t always be fair, and one person’s fairness is another person’s injustice, but if the tax system plainly isn’t fair, and capital gains is an example, we should acknowledge that and know why it is designed that way. There may be a good reason.
Farmers can justify a lack of a tax on capital gains by pointing out that they are being encouraged by the tax system to improve their farms to produce more meat, dairy, wood and wool exports so New Zealanders can pay for all the nice things we import from around the world.
It appears that the recommendation to the government will be for a capital gains tax that turns all the gains from the sale of most assets into income to be taxed as ordinary income. If a person is earning more than $70,000 per year, they are paying the top personal tax rate of 33%, so they would pay nearly a third of any capital gain as income tax. If it were a company, it would pay capital gains tax at the company tax rate of 28%. If it were an individual with less than $48,000 of taxable income per year their capital gains would be taxed at 17.5%, and so on.
Other countries treat their capital gains taxes quite differently. In Australia, for instance, if you have owned the assets for over a year, you have a choice to either (i) halve the capital gain, or (ii) reduce it by the rate of inflation before adding the reduced amount to your income and having it taxed at your personal tax rate.
In the USA most people earning over US$39,000 per year pay their capital gains tax at 15%. If you earn less than US$39,000 per year you don’t pay any capital gains tax at all. Earning around US$240,000 puts your capital gains tax up to 20%. So, they don’t treat capital gains as ordinary income tax. Capital gains has its own special reduced rate of tax.
Quite different approaches have been taken all around the world. What is true is that New Zealand is one of the only developed countries in the world that doesn’t have a comprehensive capital gains tax. The others are Switzerland, Belgium and Singapore. Singapore abolished their capital gains taxes to encourage their expats to invest back home and help their country grow.
What about New Zealand farmers? How might it affect them? Take a farmer who owns their land in a family trust. There will be some tax planning options developed by the tax experts and they are, of course, beyond the scope of the writer, and premature at this stage, but it would obviously pay to try and defer the sale of your assets that had gone up in value until your income tax rate was at its lowest, perhaps after you had retired, and most of your income had dried up.
Then there is all the fun and games involved in ‘harvesting’ capital losses that our colleagues are involved in overseas where there have been capital gains taxes for years.
If we get a comprehensive capital gains tax, we are likely to get reduced income tax rates to compensate. Might not be all bad.
Then there is the family home. If that is exempt from capital gains tax then just put all your savings into your primary home and when you need to release some capital, say on retirement, sell the family home and buy something cheaper. Spend the money you release tax-free! That seems to me to be a tax subsidy on the primary home and could distort our already expensive housing market.
Keep asking great questions …
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