ACCOUNTANCY BEYOND THE NUMBERS with Hayes Knight

Capital Gains Tax – Political Suicide or a Damn Good Idea?

It is not very often that the crowds gather around accountants at parties and ask to be regaled with stories of income tax, but just recently the Labour Party have managed to make accountants glamorous and popular. For that I am eternally grateful, but not enough to make me think it is a good idea.
Listening to the commentary has been interesting in that all of a sudden everyone has become a tax expert. I made the fatal mistake of listening to Leighton Smith on NewstalkZB the day the actual policy was announced (not the day the worst kept secret was leaked, but details were somehow miraculously sketchy) and boy was that an eye opening experience.
On the face of it, a capital gains tax has some merit on the basis that it might assist the redirection of capital from the housing market to more productive assets such as the investment share market, thereby helping to improve the overall economy. The economists seem to believe this strategy will work on the simple premise that it has in Australia. But is this really the case? I think it is dangerous to compare New Zealand and Australia in this particular matter, as our economies are based on very different fundamentals. For a start, we make most of our money from “growing things”, be it animals, plants or their related bi-products. The Aussies on the other hand have been blessed with rich mineral deposits, which once unearthed are worth a fortune.
My personal opinion is that Labour has taken an OK idea that has some sensibility around it and created a nightmare by adding a ridiculous number of exemptions and complications. Take for example the exemptions on business sales when close to retirement, plus the exemptions on antiques, stamp collections and yachts - the complexity of the initial proposal would result in a vast annual project to calculate the capital value of assets. On one hand this creates a myriad of loop holes which we accountants will have great joy in exploiting, on the other hand it results in additional complexities therefore cost to the current system. In my opinion this will negate any possible benefits.
The proposals have been described as “back to the future” with the now relatively simple income tax system and GST legislation set to be replaced by complex schemes. Aside from the exemptions, the issue of annual valuations of assets on balance date creates enormous scope for manipulation. Interestingly, the proposed 15% capital gains tax rate was much lower than the company tax rate of 28%, which might result in a huge body of work to reclassify earnings from income to capital.
I’ve also heard commentators say that New Zealand may be the odd one out in the OECD for not having a capital gains tax. Well, as Bruce Willis (President of Federated Farmers, not the actor) pointed out; this logic equally applies to the Emissions Trading Scheme (ETS). New Zealand is the “odd one out” for bringing biological emissions into such a scheme. If we are going to use the argument that everyone else is doing it so we should, then we need to disband the ETS in favour of something that achieves its intended purpose, to reduce emissions rather than grabbing tax (which pushes up process and we all pay for).
Back to capital gains tax. Apparently we shouldn’t expect to see any monetary return until 2018, which means the whole thing is based on unsound principles. To balance the books we need to produce more income and reduce spending, not load on yet another tax.
From a purely selfish point of view though, if introduced this tax could be great news for Hayes Knight. Labour said it would be a game changer. Well it may well be for our firm. I’m off to hire some new people to work out the exemptions and reduce my client’s tax bill.

For more information on Hayes Knight please visit our www.hayesknight.co.nz

Matthew Bellingham
is CEO of innovative chartered accountancy practice Hayes Knight

www.hayesknight.co.nz