Taxed for working from home

July 31st, 2011 at 10:16 am by David Farrar

As we roll out fibre to the home, more and more people will work from home – at least part of the time. This will have a number of positive side-effects such as reduced congestion, lower carbon emissions and reduced office rental pressure.

However as previously reported here, and now by Maria Slade in the HoS, Labour’s proposed will tax people who work from home.

Ernst & Young tax partner Jo Doolan said Labour had claimed that only a small proportion of New Zealanders would be impacted by capital gains tax, but because most firms employed fewer than five people many owner/operators could be affected.

“It’s quite clear in [Labour's] document … but they’re hoping they can distract attention from it,” Doolan said. “Let’s not be sneaky about it and pretend it’s not going to impact on a lot of people.”

Small and medium enterprises (SMEs) could choose not to claim tax deductions for a home office, and would therefore avoid the capital gains tax. “Either way you’re going to be paying more tax. We want our SMEs to grow and that’s absolutely critical to the future. We can’t afford to be hitting them.”

And just think about the compliance costs:

There would also be issues in policing it, defining the areas used for operating the business, and valuing those areas, Craig said. Many entrepreneurial companies kept costs low by working from home. “Why would you punish that efficiency? It’s going to add a whole lot of compliance obligations for very little practical effect,” Craig said.

BusinessNZ chief executive Phil O’Reilly described the proposed tax as “absolutely counterproductive”. If a person owned a house for 10 years but ran a business from the home for only half that time, which part would be subject to the tax? “It just shows you the ridiculous nature of this proposal.”

If you are going to do a Capital Gains Tax, then it should be simple and fair and apply to all assets.

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50 Responses to “Taxed for working from home”

  1. hj (5,674 comments) says:

    Shilling for the property industry again? The group that has been the beneficiary of a massive transfer of unearned wealth and needs a political patronage to maintain its favorable treatment.

    [DPF: 10 demerits. If you read what I said, I actually advocated a CGT with no exemptions]

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  2. gravedodger (1,426 comments) says:

    “If you are going to do a CGT, then it should be simple and fair and apply to all assets”

    That would require rational logical thought, an understanding of what actually happens in the real world and acceptance of the fact you can’t legislate wealth, only poverty.
    For socialist career Politicians who have never indulged in the world of risk, decision making, suffering the consequences of wrong moves and have acquired all their knowledge from similarly shielded teachers and peers, it just aint gunna happn.

    Their latest rubbish was only ever all about “taxing rich pricks”, remember the softening up with Nash et al using dodgy figures showing rich prick dairy farmers avoiding their “fair share”.

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  3. seanmaitland (401 comments) says:

    @hj – umm, did you even read the article? Its about CGTs being applied to home offices.

    I.e. – taxing the fuck out of sole traders already paying shitloads of provisional and GST tax on their income.

    “Bleat, bleat, bleat, smokescreen, obfuscation” is all you can come up with because you don’t have a valid response to it.

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  4. Jimbob (639 comments) says:

    “Lower carbon emissions”. How long is this dead horse going to be flogged?

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  5. hj (5,674 comments) says:

    @hj – umm, did you even read the article? Its about CGTs being applied to home offices.
    ……
    o.k I’ll withdraw that.

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  6. DT (104 comments) says:

    I am constantly amazed when ignorant tax accountants are assumed to know anything about economics.

    Lets be clear. The CGT would only have an impact on someone working from home to the extent that a person working from home is writing off their rent/mortgage payments as tax deductable (which ordinary people not working from home can’t do) – ie if they are treating a % of their home as a business to get a tax break, it is a natural symmetry that that part is covered by the CGT since ordinary people’s homes can’t be used for tax breaks.

    I’m personally undecided on a CGT, and it is hard for most people to get a fair view when ‘experts’ are actually self-interested partisan people who have a clear bias.

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  7. DT (104 comments) says:

    I think that the media needs to try harder to get expert comment from people that are both experts and non-biased.

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  8. nickb (3,629 comments) says:

    What is especially interesting is that most accountants with half a brain claim home office tax deductions even if the home is not really used for the business – e.g a portion of rates, depreciation etc on the home.

    Will making these claims expose the home to CGT because the self-employed person uses a home computer for a bit of bookkeeping? Jo has touched on this issue.

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  9. seanmaitland (401 comments) says:

    @DT – and those people getting the tax breaks are putting that money into their self-employment – i.e. productive investment. Yet, Labour wish to penalise them……

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  10. DT (104 comments) says:

    @seanmaitland:
    How do you know what they put their money into? They more likely spend it on consumption. And anyway, if they need an unfair tax advantage over other people to make their business competitive, it is probably not a great business model that they have and they should probably look to get into another industry.

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  11. Psycho Milt (1,974 comments) says:

    What a steaming pile of bullshit.

    1. You bet Ernst and Young partner Jo Doolan is strongly opposed to tax changes that might encourage home office users not to claim tax deductions for the office. How’s she supposed to make money out of people not claiming for things?

    2. The article only makes sense if you believe that taxation is inherently unfair. You’re entitled to believe that if you like, but don’t expect the rest of us not to ridicule your whining. And especially don’t expect PAYE taxpayers to feel a burning sense of injustice that non-PAYE types might have to front up some cash for a change.

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  12. Anthony (736 comments) says:

    I have a sneaky suspicion you are only saying that DPF because you know no politician would ever introduce such a tax. It’s the old “if you can’t have the perfect version then you shouldn’t have it all” argument – which is of course usually a load of rubbish! I agree a CGT should be as simple and as broad as possible.

    One way to include higher valued family homes (and a similar rule could apply to businesses I guess) would be to have a tax free threshold of say $500k and houses sold for more than that would have any gain taxed proportionally, e.g. a house sold for $700k would 2/7ths of any gain taxed.

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  13. seanmaitland (401 comments) says:

    @DT – because I run my software development startup from my house, and we can’t afford to rent out official premises yet. All our income (me and two other guys) is sourced from clients in Europe. Its anecdotal for sure, but if I’m doing it, then there are bound to be a lot of others doing it also.

    The alternative is I give up and me and the other two guys go and work for other companies in NZ or public sector in NZ.

    Your so-called “unfair” tax advantage accounted for $4000 last year in home office expenses and depreciation of equipment – i.e. $1200 in tax write off. You calling it an unfair tax advantage shows you don’t understand the big picture – the alternate option for me is to close the company down and suddenly 300k per year of money coming into the NZ economy is wiped out. Sure, these are small numbers, but I bet its already a crapload more than you bring into the economy.

    By the way, once our company takes off, and we are hiring dozens of people in NZ – will you still be whinging about how when we were getting off the ground, we claimed home office expenses? Or will it not seem so unfair then?

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  14. mattyroo (880 comments) says:

    I was thinking about this CGT and shares….

    I’ve got some shares in one particular company that have been put in the bottom drawer, original purchase price was ~40k, they’re now worth ~18k…. I don’t need a lecture on the fact that I should have sold them when they broke all of my trading rules, but what I am wondering is how Labour will tax me on them.

    For instance, on Labour’s Valuation day, will my shares be valued, at their current market price, of, for arguments sake, 18k?

    If they then were to rise to a value of say 25k, and I wanted to liquidate them, am I liable for the capital gain on the 7k? Even though I have actually made a loss on them of 15k?

    I can’t be assed reading through their policy, I doubt they have thought about this anyway, but just left it up to the panel of experts.

    Does anyone know the answer?

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  15. Michael (880 comments) says:

    Mattyroo – yep, that’s the deal. You can’t retrospectively claim capital losses.

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  16. Puzzled in Ekatahuna (329 comments) says:

    “If a business owner works from home, when the property is sold they will have to pay 15 per cent capital gains tax on the part of the residence used for running the firm, Labour says.”

    If someone works at home and uses one of the home’s rooms for that, then through illness or whatever, stops working and the room again becomes a bedroom, a home entertainment room or whatever, do they pay tax when that occurs?

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  17. Grendel (873 comments) says:

    according to the guys who delivered my photocopier on monday to my home office, they deliver a sizeable ratio to home based businesses. a lot of sole traders and small businesses are working from home, hell why would i give up my ocean view for some shitty inner city office!

    but to be taxed (again) for daring to try and better yourself, only labour could think its fair to just keep kicking you.

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  18. nickb (3,629 comments) says:

    1. You bet Ernst and Young partner Jo Doolan is strongly opposed to tax changes that might encourage home office users not to claim tax deductions for the office. How’s she supposed to make money out of people not claiming for things?

    If it wasn’t for the fact that you know jack shit about this topic, you would actually realise that ALL tax professionals prefer s simpler tax system and advocate as such in the media.

    Labour’s tax policies will close the grand total of 0 loopholes and open up 75980735 new ones.

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  19. Other_Andy (2,079 comments) says:

    The Facts of Life for Liberals
    “Mommy, where does money come from?”

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  20. RKBee (1,344 comments) says:

    Bugger.. if this ever sees the light off day .. ill have to move my Laptop to a smaller room.
    Most farmers that go to town.. go to see their accountant… Yeah right.
    About compliance costs etc… Is their anyone in New Zealand that doesn’t get a tax cut of some sort and actually pays their full amount of tax or is not on a benefit of some sort… I haven’t meet one.

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  21. Anthony (736 comments) says:

    What a joke nickb – tax professionals know what side their bread is buttered on – I’ve never yet seen one publicly advocate removing the current capital gains tax provision that says the sale is taxable if the asset was purchased with the intention of resale! That is because this ambiguous provision generates a lot of work for them. If they were all about simplicity why are they saying change it to any asset sold within one year of sale (keeping all the current exemptions)? John Shoe-in and his ilk are all about making money to line their own pockets! I see a tax manager owns the most expensive house in Wellington.

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  22. Bogusnews (425 comments) says:

    I became self employed mid way last year. I had worked for 20 years in the computer industry, but after two companies I worked for went belly up in a four month period, I decided to try creating my own job.

    I tried WINZ for temporary support (having a mortgage, three kids and wife at home I was pretty desperate for any assistance) but they told me I would have to wait five months before they would pay me anything. This was upsetting because I worked for 25 years paying taxes, never claiming anything (no benefits, no hospital treatment etc) but because I had been on an above average income I would have to wait that long before they paid me anything.

    So I had to do it all myself. This was initially incredibly difficult with us living initially off our savings, then credit cards. We had to not only support ourselves, but purchase all the equipment needed to set up the business along with a multitude of incidental items (business cards, websites, advertising etc) and through all this, not really knowing if it would ever be successful.

    As it turns out, it is working and we are now earning enough to start paying back the money we put on our credit cards and a small personal loan, but things are still incredibly tight but if they continue to grow as they are, we’ll be employing our first full time staff member by the end of this year.

    Yes, I will be claiming back a portion (about 10%) of my house expenses, and most of my car costs but frankly, this seems like a very small advantage to have in comparison with the stress and almost unbearable pressure we have had to go through over the last 10 months.

    While it is deeply disappointing that the usual lefties who prowl this blog want me to be ashamed of this I absolutely refuse to be. I don’t think anyone knows the stress and work a self employed person gets (especially in the beginning) during setting up a business. But since I very much doubt any of these nay sayers has or will ever do anything like this I guess it is something that people who want to do something with their lives and not rely on the govt just have to tolerate.

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  23. nickb (3,629 comments) says:

    That is because this ambiguous provision generates a lot of work for them.

    In terms of the current sale of land provisions this is in fact by far the easiest area of the law to apply. You obviously don’t read very widely if you think tax professionals enjoy the shambolic state of the Income Tax Act. All the bullshit harebrained political schemes get left to us to sift through the detail. We are taxpayers too and don’t enjoy all the ridiculous compliance costs anymore than our clients.

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  24. Anthony (736 comments) says:

    Nickb one tax professional told me a few years ago that up to 50% of his work was generated from the differences in tax treatment between capital and revenue gains.

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  25. Mick Mac (1,091 comments) says:

    We’ve claimed an office at home for 8 years and the thought of ‘them” taking a % from all our hard work at the end makes me sick inside.
    Least tax, flat tax is my motto.
    Not going to happen though whilst we have so many middle class beneficiaries beholden to the government of the day or to The Labour.
    Rather the tax not taken off of them in the first place.
    As one of the 164,000 households who pay 70% of the country’s tax I’m moving towards the no tax no vote crowd slowly but surely.

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  26. kiwi in america (2,321 comments) says:

    Excellent posts seanmaitland and bogus news.
    The left is clueless when it comes to the productive sector and what it takes for a small business to first succeed (70%+ fail in the 1st 5 years), then pay its proprietor a living (otherwise why bother and just go back or stay working for someone else) and then to expand to a point where it can support more staff and a bigger premises.

    Many many businesses are started from home. I remember my first year operating on my own – my loss was $20,000. I had to fund my living costs, mortgage and start up costs from savings and cashed up super. My second year I made $5,000 and my third year $20,000. It as was not until year 4 that I made about the same as my previous salary and Year 5 before I bettered that. At anytime through those years I could’ve lost my home if my business failed. If I add up the taxes I’ve paid in New Zealand (before leaving for the US), PAYE on staff wages and GST on the various business related expenses it far exceeds my PAYE on my salary had I stayed with my old employer (a very stable recession proof company). The left forgets that a huge portion of the tax base comes from the sum total of all the employers like this in NZ. Big companies used to be small companies once and, aside from the government workers’ PAYE (which really is recycling tax payer dollars anyway), all the money the government uses to pay nurses and build roads and pay for those on benefits come from people like sean and bogus.

    A CGT imposed on tax deducted private dwellings used for business is another impost on the small business owner. It reduces what are usually already quite low incomes – the fact that a business operates from home is a marker for an early start up or small business and it is highly likely its proprietor is in the income range that I cited from my own experience. A CGT may tip the owner in favour of calling it quits and going back to work for someone else. It acts as a disincentive to take the risk in the first place thus preventing a budding entrepreneur from stepping forth with their new good or service.

    The left of course believe that its all about ending speculative behaviour and fairness. But they forget that trading activity of any type, especially the speculative trading of shares and property, is already subject to a CGT of sorts and so the new revenue raised from Labour’s proposed tax will not come from this sector of the economy, it will come from the pockets of middle NZ who had the temerity to attempt to provision for some of their retirement by acquiring those evil bad rental properties. The biggest tax leakage with respect to rental properties, the depreciation deductions, has already been shut off in last year’s budget.

    This aspect of Labour’s CGT, hitting small start up businesses when they are the most vulnerable, is typical of the non business owning background of Labour’s caucus and their utter cluelessness on the perils and risks undertaken by the wealth creating class. The taxes off their profit (that only arose from their risk taking) and off the wages of the people their companies hire are the money that governments spend and that the left is forever finding new ways to spend. You strangle that tap of revenue and you strangle the lifeblood of the economy.

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  27. Inventory2 (9,787 comments) says:

    @ bogusnews – well done mate; I can identify with you. The business that we started eight years ago from home now employs over 30 staff, and whilst it was based at home initially, we had to move to commercial premises two years ago. We still have a home office though, which is where I spend the majority of my time.

    We did it tough in the first couple of years, and the tax relief we got for a home office was both welcomed and made a real difference. Now, if Labour is elected (God spare us!), we have to forgo future tax relief for the cost of maintaining the office at home, or face a CGT both on the sale of the business and the sale of our home. Guess I won’t be voting Labour…

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  28. Anthony (736 comments) says:

    The home office thing is really a non-issue as depreciation on buildings is no longer deductible so it will be a share of genuine home expenses that will be deductible. I can’t see any issue here!

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  29. seanmaitland (401 comments) says:

    @DT – your silence is deafening – lets hope you’ve had your eyes opened to what it takes to run a business, instead of sitting in the aisles being envious of others

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  30. plebe (271 comments) says:

    I became self employed mid way last year. I had worked for 20 years in the computer industry, but after two companies I worked for went belly up in a four month period, I decided to try creating my own job.

    Im confused here , i thought computers and cows tits was john keys highway to prosperity, but then i saw a newspaper article that said whores is the way NZ should go.Hell two computing companies falling over,what will happen when the world finds out cows are fucking up NZ and the enviroment, FORCLOSURE. John key, your $55000000 grin might not save us.

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  31. Bogusnews (425 comments) says:

    Hey inventory and KIA, thanks for the encouragement.

    Great to hear both your business are doing so well. I’d love to catch up with either/both of you sometime. Surrounding yourself with positive people has been an absolute boon for the last 10 months, especially since many people seem to doubt my sanity.

    Cheers guys.

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  32. SPC (4,614 comments) says:

    The business costs claim for using a home is for “income” tax purposes, the CG tax excludes the family/residential home – end of story. This is a beat up.

    As for the idea of taxing the family home (that Labour excluded) – has no one considered the injustice of people losing equity in their home every time they moved house – for with every sale at the then market price people would sacrifice equity to meet any CGT liability and have to borrow this amount to buy a new home (increasing our indebtedness).

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  33. Inventory2 (9,787 comments) says:

    @ Bogus; consider getting yourself a business coach or mentor. Coaching is not cheap, but for us it’s absolutely been money well spent. As the business grew, our structures and processes didn’t, and that could have been catastrophic. Our coach has been invaluable in that regard; making us step back and look at everything we were doing, and challenging our thinking. Even getting into a discipline of planning, setting goals and objectives, and having a clear vision as to what we want to achieve has been great. It’s all stuff that I was hugely sceptical about, but now I’m converted because I can see how we’ve benefitted.

    Apologies DPF; this has gone a bit off-topic in some ways. But I’m still outraged that a future Labour government is going to want a slice of the action when we sell up eventually; a business that WE have built up from nothing, and for which WE have taken all the risk, invested our own dosh in and had the sleepless nights. Little wonder that small business dislikes Labour.

    PS – Bogus; drop me an e-mail any time.

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  34. SPC (4,614 comments) says:

    It’s not possible to collect CGT on a residential home sale (also used for a business purpose) unless the business has claimed mortgage payments as a business cost … this is a non issue.

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  35. flipper (3,266 comments) says:

    This from Whale sums up Goffie, Love my Hair and noddy Parker:
    “Luft­men­sch (Yid­dish)
    There are sev­eral Yid­dish words to describe social mis­fits. This one is for an imprac­ti­cal dreamer with no busi­ness sense. Lit­er­ally, air person.

    Very suc­cinctly describes Phil Goff I thought.”

    When the definition of tax fairness is that everyone pays the same RATE of tax (No incremental scale) and the idiotic transfer payment system is abolished, I will agree to a CGT on the basis that it is at the same flat rate on everything. AND … and this is the elephant in the Chamber … ALL losses are deductable.
    Until then – GET STUFFED!

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  36. seanmaitland (401 comments) says:

    @SPC – um, no it isn’t – as it is valid to claim a % of mortgage interest as home office expenses. Obviously you haven’t ever tried to run a business or worked from home……..whoops, looks like you should’ve read up on it a bit!

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  37. SPC (4,614 comments) says:

    Tax on labour income/profits while there is none on capital income/profits is not fair.

    There should be a similar tax regime for tax on interest income and CG.

    The option proposed is to tax CG at one flat rate 15% and not account for inflation – interest income is taxed without regard to the inflation component either but is taxed at varying amounts depending on the income bracket. So the natural alternative was/is to tax at the marginal tax rate (as is done with interest income) and allow adjustment for inflation.

    Some countries overseas tax larger corporates at higher rates than small businesses (see above).

    me rcre – meaning varying rates depending on income bracket and adjustment for inflation. The option taken

    r (going for a 15% flat rate without inflation factored in means a is

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  38. SPC (4,614 comments) says:

    sean maitland – did you comprehend what I wrote.

    “It’s not possible to collect CGT on a residential home sale (also used for a business purpose) unless the business has claimed mortgage payments as a business cost … this is a non issue.”

    Read the word unless in capitals this time.

    If someone claims their residential home mortgage payments as a business cost then of course they of course then risk losing their family home exemption from a CGT.

    This does not end an ability to claim business costs only that business cost.

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  39. SPC (4,614 comments) says:

    If one was to design a fair CGT for homes used as businesses – those that have claimed mortgage payments as a business cost, one would probably set a threshold under which the home was still expempt from a CGT (say under a 1/4rd of the mortgage payment was claimed as a business cost or under 1/2 the time the house was owned a business cost claim was made), and above the threshold some method to assess the proportion of home sale CG that was then liable to the CGT.

    An example – equity 20 %/50% of mortgage share 80 % * 3/4 number of years house owned a business expense was claimed – then 33% of the CG made is liable to a 15% tax.

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  40. SPC (4,614 comments) says:

    “30%” of the CG would be liable for the tax.

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  41. questlove (241 comments) says:

    This does not end an ability to claim business costs only that business cost.

    In the NZH article it didn’t specify that it would be only claims on mortgage interest that would see a business lose their family home exemption.

    “The principle behind it is if you’re claiming expenses [for working from home] you can hardly say that’s not a business asset.

    Small and medium enterprises (SMEs) could choose not to claim tax deductions for a home office, and would therefore avoid the capital gains tax.

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  42. SPC (4,614 comments) says:

    The article is about a Labour Party policy that is not clearly specified, the principle detail as to capital gain is invested capital in ownership of the asset and then the value of any asset value improvements – and the only business cost relevant to that is any mortgage payment claim valuing the business component to a proportion of the home value (the rest are expenses charged against business profits).

    Labour excluded the farmhouse and home surrounds from any CGT on farmland, a similar principle applies here.

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  43. questlove (241 comments) says:

    Thanks.

    So for example if your business is 10% of the total floor area then usually you could claim 10% of the mortgage interest paid (not principal repayments). So I take it here that if you pay $20,000 per year interest then you’d be losing $2000.

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  44. SPC (4,614 comments) says:

    It could only be assessed on the realisation of a CG on sale – at 10% of the CG – so effectively a CGT of 1.5% on the total CG.

    Personally I don’t think the tax is worth the effort collecting it.

    I would favour an exemption for such homes – calling it a small business start-up subsidy.

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  45. questlove (241 comments) says:

    I was meaning the cost of someone forgoing a mortgage payment claim in order to be exempt from a CGT.

    But yes either way it does seem not worth the effort.

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  46. SPC (4,614 comments) says:

    The maths tend to support continuing to claim the business cost and facing the small CGT liability later.

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  47. kiwi in america (2,321 comments) says:

    SPC “I would favour an exemption for such homes”
    Therein lies ones of the problems with CGTs in general and the CGT as proposed by Labour. When too many politically sensitive (ie potential Labour voting) segments of the electorate are in the gun, out comes the exemption pen and you end up with a confused unwieldy tax that is open season for accountants to find loopholes. Said loopholes and exemptions undermine the revenue base projected from the tax thus blowing a hole in the tax and spend lefties dreams to use the money to bribe voters or expand the welfare state (essentially Labour’s primary goal behind the CGT). This outcome is all too common with all but the cleanest CGTs with minimal exemptions (the Greens favoured approach).

    The Greens are at least more intellectually honest about a CGT – they see it as a pure soak the rich tax designed purely for income transference from perceived rich to poor and so they see no need to exempt anything except the family home.

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  48. freedom101 (439 comments) says:

    The CGT is brilliant. It will galvanise a huge number of people into working to ensure that Labour does not gain power. Anyone who aspires to working their way up in the world will run from Labour. Not only are they going to put a CGT in place, they also want to raise the top rate again. If the company rate is 28c and the top rate is 39c then guess how many new companies will be started. Labour will trumpet the stats as proving that entreprenurial activity has increased due to its policies. Yes, but not the type of wealth creating entreprenurial actiivity. Rather, wheel spinning, unproductive, tax planning and general waste of time and money activity. I hope Phil Goff remains Labour leader for the next 20 years.

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  49. burt (7,085 comments) says:

    Of course Labour wants to tax people who work from home. Working needs to be discouraged as harshly as possible to discourage people from such a stupid thing. People need to be beneficiaries and need to vote for more welfare every three years – only then will NZ be the proud socialist state where nobody earns too much and nobody earns too little and we all vote Labour.

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  50. SPC (4,614 comments) says:

    I think in the end just about all “from the home” small businesses would be exempt from a Labour or Green CGT – both exclude the family home – and this should in principle include the farmhouse and these businesses operating from homes. Labour simply pointed out that some “like motels” would be excluded from the exemption.

    As for the philosophy of the CGT, it is for all forms of income to be taxed – excluding tax on CG simply places a higher tax burden on companies and workers. It’s silly that the right cite a regressive tax like GST as good for broadening the tax base so lower tax rates can be introduced but oppose a CGT (because it impacts more on the rich) when the same principle applies – note carbon taxes achieve the same goal.

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