The case against a CGT
July 16th, 2011 at 9:00 am by David FarrarI’ve said that in principle I support a CGT, if it is part of making NZ a broad base low rate tax system. Former ACT Leader Rodney Hide makes the argument against a CGT, as an effective double tax on business. He writes at interest.co.nz:
A business generates $100 a year. The going discount rate is 10 percent. The value of the business is $1,000. That’s if there’s no tax.
Introduce a tax of, say, 30 percent, and the business now yields only $70 a year. The business is worth only $700. The tax liability is capitalised into the value of the business.
Now let’s say I buy the business and fix it up. I double its income to $200. In the absence of any tax the business is now worth $2,000 and I can sell the business and pocket a $1,000 capital gain. However, if there’s an income tax of 30 percent the increase in the business’s value is from $700 to $1,400. My capital gain is now only $700.
My gain is not tax free even though I appear to pay no tax on my gain.
That’s because the capital value reflects the extra tax the extra income the business generates.
A capital gains tax of 30 percent reduces my gain from $700 to $490. I am doubly taxed.
Capital gains aren’t tax free and a capital gains tax doubly tax savings and investment.
Put like that, it does appear to be a double tax. Any arguments against the logic?
Capital gains tax is brutally unfair
There are plenty of ways a capital gains tax is unfair. Imagine a young widow with children whose husband poured his heart and soul into his business. Following his death the young widow has no choice but to sell the business. She has no income and no other assets.
The business was a start up. It generates $200 a year. After tax, that’s $140. The business sells for $1,400 upon which capital gains tax has to be paid at say 30 percent.
She nets $980. In the absence of any tax she would net $2,000.
The widow is taxed at 51 percent. That’s brutal.
A good case against by Rodney
Tags: CGT, Rodney Hide
July 16th, 2011 at 9:14 am
Well, if he’s arguing against it as some sort of precedent, I don’t think it’s very compelling; a tax on a tax is a perverse but widespread phenomenon. I pay income tax but I also pay gst while spending the untaxed portion of my income. It’s been a while since I’ve owned a house but I understand we pay gst on rates too.
Vote:July 16th, 2011 at 9:15 am
And there you have it in one simple, easy to understand, article.
Capital profits are not “tax free”. At least, they aren’t if based on an earnings formual or methodology.
Vote:July 16th, 2011 at 9:17 am
Put like that, it does appear to be a double tax. Any arguments against the logic?
Yeah – technically you’re actually triply taxed because you also pay GST, further reducing yield. But having a range of broad, low taxes is better than having a single avoidable tax which distorts investor behaviour.
Vote:July 16th, 2011 at 9:25 am
No, no Danyl.
Goff’s point is that while wage earners pay tax on every dollar they earn, people who make capital profits pay tax on none of it.
Vote:July 16th, 2011 at 9:27 am
As usual, Rodney is a drongo.
First, an assumption is made the the business has paid all the tax it was required to pay, and not used various mechanisms to artificially reduce its apparent income and avoid tax.
Second, he applies a 30% CGT to his examples whereas Labour is proposing a 15% CGT.
Third, his scenario of the young widow may well be exempt from CGT under Labour’s proposal for small businesses.
Maybe Rodney knows something about a National Party CGT at 30% Hone Key is yet to announce.
An interesting comparison of CGT rates here http://www.accf.org/publications/89/an-international-comparison-of-capital-gains-tax-rates
Seems Labour’s CGT regime is very light compared to many other nations.
A CGT is long overdue, Labour simply need to revisit it so there are no exemptions other than the main family home.
Vote:July 16th, 2011 at 9:31 am
The argument that it will divert savings to productive assets is also ignorant crap.
Both company shareholdings and investment properties not previously liable for capital gains tax will now both be liable. No change to the relative taxation incentives.
However, residential homes will now have an additional capital gains tax advantage of 15% over both. Money will flow from both shares and investment properties into them.
Vote:July 16th, 2011 at 9:35 am
I would be grateful if Mynameisjack could just one example of a mechanism to artificially reduce income and avoid tax.
Vote:Not two, three or four examples; just one please.
But I am not sure that he will do so. In fact I have $10 wager that anybody who uses the word drongo to describe a well educated economist, will be too scared to disclose one example.
July 16th, 2011 at 9:41 am
MNIJ
Don’t call Rodney a drongo, you fucking drongo.
Instead, tell me all about these ‘various mechanisms to artificially reduce its apparent income and avoid tax.’ which exist only in the feverred imaginations of socialists who’ve never set foot within a hundred miles of any real business.
Vote:July 16th, 2011 at 9:42 am
Tauhei
Do you mean reducing income, or simply increasing expenses (thereby reducing taxable income)?
Vote:July 16th, 2011 at 9:54 am
MyNameIsJack as a business owner I would really like to know more about artificial means to lower taxes. I’m all ears. How do I do that?
Vote:July 16th, 2011 at 10:08 am
Ah well you buy houses so the have nots can complain and call you a capitalist and so on. Not hard at all.
Vote:Idiot Communists.
July 16th, 2011 at 10:09 am
MM if you don’t know the difference why waste the paper on this blog!
Vote:July 16th, 2011 at 10:16 am
Still what about Women in Labour?? eh.
Got to be careful what you use to display your press releases.
Cunnlife, displaying videos of women in Labour. To explain CGT.
I mean, they really are screwed up.
Haha even funnier. Cunnlife’s name comes up as a spelling mistake. So click on the fix spelling and guess what comes up.
Oh Dear.
Cunnilingus
We won’t make any funny jokes about things like “fanny licker’s” and Women in labour. Well why wouldn’t we.
Vote:Not sure if there is going to be a CGT on that proposition.
Hehehe
What joy.
July 16th, 2011 at 10:20 am
The claim CGT is a fair tax is crap.
The State could employ a state servant. For no other reason than it needs another parasite. This person could work all his life doing SFA retires with a free hold house and a nice pension. Then sells his family home CGT free and moves to AUS to be with the kids.
Meanwhile A farmer works his guts out . In rain, hail and drought. Forced to pay GST, FBT, PAYE,etc etc etc to pay for that little parasite who is just sitting out his days to fly off to AUS.
Vote:Finally decides to retire. Sells the farm and gets socked for CGT.
July 16th, 2011 at 10:25 am
I’ll see your $10 and raise you $10 more. I own 2 businesses and would lve to know how I can hide the profits. And I have 2 accountants and have used the services of a tax specialist none of which have changed the equation revenue less expenses = profit taxed at 30%.
Yes you can delay the tax by reinvesting profit into equipment (ie increasing expenses) but ultimately that just produces more taxible profit and as a business person you only invest where you can earn a rate of return, you don’t waste your money (something you green eyed socialists don’t get)
Vote:July 16th, 2011 at 10:26 am
The spin about redirecting investments to something productive is total bollocks as everything wil be taxed the same.
Vote:Comparatively nz has a fantastically simple tax system, labour should have learned from the debacle of their envy rate last time.
Warren buffets tax return was 6foot high and his marginal rate was lower than the lady who cleans his office. Not something we should aspire too.
July 16th, 2011 at 10:27 am
Rodney Hide…Masters degree in economics…MNIJ…. master-bator.
Vote:July 16th, 2011 at 10:32 am
Yes. It assumes that the counterfactual is other tax rates stay the same.
As you’ve said before, you think every party should announce how big a share of the economy they think the Government should be.
National doesn’t want to increase the size of government. ACT wants to decrease the size of government. Labour wants to increase the size of government.
Given that, Labour will have to pay for it somehow. Should it be:
*large increases in corporate taxes, and across-more-of-the-board increases in income taxes; or
*no increase in corporate taxes, a targetted increase in income taxes, and a CGT.
Yes, the introduction of a CGT will raise the overall tax burden. But the alternative way of paying for a larger government also involves an increased tax burden.
Rodney Hide hasn’t given an argument against a CGT. He has made an argument against Labour’s intention to increase the size of government because of the consequences that tax will increase. No kidding. This has very little to do with a CGT.
It is a good argument to have – what is the appropriate size of the government – but tying it to a CGT is stupid. ACT could just as easily support a 20% CGT in order to lower tax rates on personal income and company profits to 20%. Labour is supporting a 15% CGT in order that they don’t have to raise other taxes.
Also, my understanding of Labour’s proposal was that CGT wasn’t charged at inheritance. Who would be taxed on the sale of the business in his widow example? Not the former owner, the gain wasn’t made until after he died. And not the widow, she hasn’t made a capital gain: the business was worth $1400 when she got it.
Also, using a 30% CGT figure is moronic when Labour’s CGT is at 15%, and using a $2000 business is moronic when Labour has said capital gains below a certain level won’t be taxed.
Vote:July 16th, 2011 at 10:36 am
Rodney’s business only generates $100. PA?
Must be a ChCh cabbie.
Vote:July 16th, 2011 at 10:38 am
MNIJ, everyone is waiting……
Oh this is embarrassing. Full of shit and nothing to back it up?
……..
Vote:July 16th, 2011 at 10:44 am
Yes. Rodney had to lose a low figure, because if he used a realistic figure, everyone would have realised the CGT was mainly about people a lot wealthier than them
Vote:July 16th, 2011 at 10:50 am
This from Mary holm:
It’s amazing how easy this is and how widespread the practice is. Just one example: my gardens. The price of every bit of timber for my private garden – fencing, gates, retaining walls, raised gardens, etc includes GST. A farmer can charge all these items to the business, quite openly, and gain in tax and GST.
On the income side, where an item of income can be transferred to a private account, the tax-free income derived by cheating is increased by the GST percentage as a bonus.
For your information, I have never been a farmer.
And now that you’ve told the world about their crafty little tax games, I don’t imagine farmers would welcome you into the fold – if they knew who you were.
Before I’m deluged with letters from indignant farmers, I hasten to add that I’m sure not all of them are hell-bent on paying as little tax as possible – just as not all trusts are set up for that purpose. Indeed, there are honourable reasons for setting up trusts, as explored in this column in some depth a few years ago.
you’ll have to arrange for MyNameIsJack to get his $10 (unless the article is out of date).
Vote:http://www.nzherald.co.nz/mary-holm/news/article.cfm?a_id=17&objectid=10524829
July 16th, 2011 at 10:54 am
I think the main aim of a CGT is to dent speculation in property. It’s nice that a farmer retires with a capital gain but not so much that the land is now worth many times more than it can actually produce. In addition the next generation of home buyers shouldn’t be paying execively for land prices when the owner has done very little by way of improvements.
p.s typical of Hyde to be brown nosing the $6 billion (or so – (much of it made via asset inflation) assets and 20 corporate member Property Council.
Vote:July 16th, 2011 at 10:57 am
Mary Holm as an authority on the tax system or the property market? Bahahahahaha.
I laughed at this bit:
A farmer could by a double-sided dildo and charge the item to the business if they want to, it doesn’t make it legal. But all farmers do this because Mary says so?
What a laugh. And this from the woman who tells her readers that shares are a better bet than property….. yawn
Vote:July 16th, 2011 at 11:01 am
I will vote for Labour and a CGT, but only if they also promise to remove the biggest drain to productivity they ever foisted on to us and remove the utterly stupid and vapidly wealth envying socialist Working for Families rubbish!
Vote:July 16th, 2011 at 11:05 am
Mary Holm is a grade A twit IMHO. The farmer could legitimately fence his garden to keep stock out, once. The value would scarcely offset his increased living costs for everything in the country.
Vote:July 16th, 2011 at 11:07 am
hj: “I think the main aim of a CGT is to dent speculation in property.” Then it is a certain, abject failure constructed by idiots. See my post at 9:31am.
Vote:July 16th, 2011 at 11:14 am
Gareth Morgan on the Nation is going on about about CGT moving investment in to productive areas. Why is everyone spouting this BS – all the productive areas are taxed too!
If you buy a business and sell at a gain – CGT
If you buy shares and sell at a gain – CGT
I hope Labour make it retrospective on the sale of Trade Me!
House prices rose higher in OZ than NZ over the last 10 years. The reasons were mostly the home owners bonus and banks giving away money but the other thing is that people build the CGT into the asking price. If I am going to sell my house I work out what the agents will cost, lawyers will cost and what CGT (or stamp duty) will cost me. What is left impacts on my asking price. If I don’t get it I don’t sell.
Vote:July 16th, 2011 at 11:18 am
Quite correct, BlueGriffon.
“Why is everyone spouting this BS.” Because the MSM is staffed by morons with neither brains nor experience and will simply print anything they are fed.
Vote:July 16th, 2011 at 11:21 am
Will government itself have to pay CGT? ACC buys quite a lot of shares and buildings. Will they also pay the CGT. I guess this is something for the ‘expert panel’.
15% is also an interesting amount? I wonder if they will actually make GST payable on all these things rather that a CGT?
Vote:Charging GST on all house sales would bring in a fair bit of cash for the tax and spenders.
July 16th, 2011 at 11:23 am
Danyl, GST is not a cost on a business, GST is passed on to end buyers. Any GST paid out by business is offset or refunded.
Vote:These tax discussions are always enlightening in the way they show up those of left wing persuasion to be so ignorant of the mechanics of business. The left despise capitalism but constantly return to the well that is kept full by the efforts of others with business acumen. John Key is correct; there are already far too many taxes.
July 16th, 2011 at 11:30 am
A farmer can charge all these items to the business, quite openly, and gain in tax and GST.
Not just farmers. Tradespeople. People in many types of businesses – who often also take cash out undeclared. Illegally avoiding tax is widespread and generally regarded as simply what you do if you can get away with it.
Plus all those who pay mates rates to get things done or acquire goods under the table.
I’ve done it. Who hasn’t?
Vote:July 16th, 2011 at 11:41 am
Rodney has trotted out that line of argument for years and technically speaking it is correct. However, there are plenty of counter-examples like where landlords make a tax loss for years then sell for a fat capital gain and pay no tax on that – so have effectively been subsidised by the taxpayer – what is fair about that! Low rate broadbased taxes are the fairest and least distortionary – and Rodney knows that full well. So does Don and a pity he didn’t run that argument when criticising Labour’s tax reform.
Vote:July 16th, 2011 at 11:44 am
Exactly. In fact I think there is even a specific concessionary rule in the ITA to allow for this.
Vote:July 16th, 2011 at 11:48 am
2008 OECD paper ranks types of taxes on their apparent growth-friendliness, .. finds, unsurprisingly, that the worst-to-best order runs 1) corporate income taxes, 2) personal income taxes, 3) consumption taxes, 4) “Property taxes, and particularly recurrent taxes on immovable property.”
Vote:http://www2.macleans.ca/2010/10/21/did-2010s-man-of-the-year-die-in-1897/
July 16th, 2011 at 11:59 am
Quite right hj yet we have endless idiots on here arguing how bad it would be to take capital gains.
Vote:July 16th, 2011 at 12:12 pm
Rodney says:
“Imagine a young widow with children whose husband poured his heart and soul into his business. Following his death the young widow has no choice but to sell the business. She has no income and no other assets.”
But wait! There’s more! The widow has leukemia and her children just had all their Christmas presents stolen.
Vote:July 16th, 2011 at 12:22 pm
And Scott, yet more!
She looked up WINZ for a hand up but found the recent ACTNat government, under PM Don Brash, had sold the department to Goldman Sachs who restructured it as a loan sharking operation!
Vote:July 16th, 2011 at 12:50 pm
Anthony (379) Says:
July 16th, 2011 at 11:41 am
Rodney has trotted out that line of argument for years and technically speaking it is correct. However, there are plenty of counter-examples like where landlords make a tax loss for years then sell for a fat capital gain and pay no tax on that – so have effectively been subsidised by the taxpayer – what is fair about that! Low rate broadbased taxes are the fairest and least distortionary – and Rodney knows that full well. So does Don and a pity he didn’t run that argument when criticising Labour’s tax reform.
Umm, well your analogy goes awry at the point where you say that having made a loss the landlords sells at a fat profit.
Vote:First of course and not least is the angst of having tenants, but more importantly you forgot to mention that in making that loss the landlord has rented his capital asset at an unrealistic price and thus has been subsidizing the tenant in place of the Govt. who would otherwise have to tax you a big amount more to build and rent at even less rent housing for the poor.
So the landlord being the good citizen that he is, has saved you more money in the way of taxes you would otherwise have to pay.
Try it and see just how profitable landlording is before you rant on about things you don’t understand.
July 16th, 2011 at 12:52 pm
Luc Hansen (2,884) Says:
July 16th, 2011 at 12:22 pm
And Scott, yet more!
She looked up WINZ for a hand up but found the recent ACTNat government, under PM Don Brash, had sold the department to Goldman Sachs who restructured it as a loan sharking operation!
Now what a dammed good idea. Then LUC you could do your charity thing and help them all out whilst leaving our pockets alone.
Vote:July 16th, 2011 at 1:10 pm
MNIJ………Interesting Chart…Why is it that the Nations without Capital Gains Tax seem to be thriving while the others all seem to be in the shit.
Vote:July 16th, 2011 at 1:21 pm
If we are on about saving money for the tax system then the biggest rort out there is the ability to purchase high end expensive motor cars and depreciate them.
Vote:Why don’t we have an upper limit on the depreciation of motor cars belonging to corporates and taxable entities?
Why is their an open ended allowance for this.
These high end cars generate no wealth for anyone but slug the tax system in huge lumps. And FBT doesn’t and won’t catch them up.
Leasing them is also a rip off of the taxpayer.
All this is worse than anything a property investor does with his 2 houses which will actually assist the state at some end time.
July 16th, 2011 at 1:21 pm
Put it this way Anthony; Tax Free Capital Gains is a cunning incentive for hard working people to put their savings into a loss making rental property thus keeping rentals at a reasonable level and at the same time funding a necessary increase in housing stock. It was easy to eliminate the depreciation allowance without taking into account unintended consequences; if investors shy away from building rentals the taxpayer is left to carry he can.
Vote:July 16th, 2011 at 1:46 pm
So countries that exempt from CGT long term holdings include: Argentina, Belgium, China, Germany, Hong Kong, Mexico, Netherlands, Poland, Singapore, Taiwan.
Mostly pretty good company.
Vote:July 16th, 2011 at 5:32 pm
MyNameIsJack suggests:
It does rather call into question the remainder of his calculations when he uses a multiplier of 10 times the Gross Profit to value a privately held business for sale, yes. I know it’s only for the purposes of example but he’d actually have a stronger case if he used a realistic multiplier, which is somewhere round three. Business are generally valued on a formula:
Adjusted Net Profit Before Tax X 100 = Gross Business Price
——————————
Return On Investment %
ROI (which brokers obtain from data on actual sold businesses of similar types and size) on something like a hairdresser would be around 10%, a manufacturer 30% and perhaps for a business with exclusive rights to supply a needed product with minimal competition, 45%. Never 100%.
So Rodney’s imaginary $100 and $200 businesses would sell for around $300 and $600 respectively, thus netting their owner far less after CGT than in his examples.
It’s also unclear (at least to me) what he means by “The going discount rate is 10 percent” in terms of the business’s value in his first example.
Nit picking, I know, And less of a faux pas than a pregnant woman in a bath on the front page of your website. But the point being, I’d have expected more accuracy from Rodney, who’s usually pretty unimpeachable on economics.
Vote:July 16th, 2011 at 6:57 pm
Viking and Trout why buy the property in the first place if the rent doesn’t give a sufficient return??? And if you already have it, sell up and let some first home owner buy it! FFS, all this landlord is doing tenants a favour is largely self interested rubbish. Sure tenants are a hassle but so it is with almost any business – those damn customers! As a taxpayer who should I subside you??? Landlords don’t increase the supply of property as they buy existing old houses!!!!!!
Vote:July 16th, 2011 at 7:08 pm
Anthony; As I think I said post about something you know about.
Landlords don’t increase the supply of property as they buy existing old houses!!!!!!
Really???
Vote:July 16th, 2011 at 7:15 pm
Post something you know about – how is buying an existing house increasing the supply??? You are either buying it off an existing landlord so not increasing rental property numbers one little bit or you are buying it off a home owner who is moving – so converting an owned house to a rental property but the home they are buying may well be what was a rental property – so again no increase in rental property numbers!!! Even if the seller is buying another home that was owner occupied then there is still no increase in the number of houses available for people to live in – this is basic math!!! Only if the seller is building a new house is there an increase in the supply of property available for people to live in.
Vote:July 16th, 2011 at 7:22 pm
As this is a debate over numbers you would think there was no wiggle room….1 is 1….no? So how do we have a disagreement over what’s set in realities stone?
Vote:July 16th, 2011 at 7:27 pm
The answer James is that some are too blind to see the wood for the trees – they don’t understand simple economics! They also think the average person doesn’t have the ability to buy their own house like Kiwis have been doing for years – that if these landlords don’t buy an old dump for the average Kiwi to live, the state will have to supply a house! If houses were more affordable like they used to be back around 1999 then more people would own their own!
Vote:July 16th, 2011 at 8:29 pm
“landlords make a tax loss for years then sell for a fat capital gain”
Now let’s think, how could this happen? Probably because Governments raised the cost of land and buildings by foolish regulation. Possibly because inflation was encouraged and the fat capital gain looks anorexic in real terms.
Why not just fix the real problems?
Vote:July 16th, 2011 at 8:51 pm
Anthony (382) Says:
July 16th, 2011 at 7:15 pm
Anthony, you are tiresome really.
Not all landlords buy old houses.
Many landlords add minor dwelling to properties thus increasing the supply.
Some landlords buy new dwellings increasing the supply.
Some landlords rent their own houses whilst going oversea’s to earn the dosh to pay for them.
Some landlords buy houses allowing others to move to retirement villages which are continually being expanded in numbers, thus increasing the housing supply.
Some landlords buy properties no longer required by the previous owners.
Funnily enough its not Landlords that are required to increase the supply of houses for others in the population to buy.
It is the choice of landlords to use their capital and expertize to purchase houses that they can rent.
If they make a gain at sale time it will be the same gains that anyone else in the community can make during the same period.
That you can’t afford a house has more to do with your savings, earning and desires about where you live and how you live.
No one says you have to live in any house you buy. You can buy a rental in a relatively cheap area thus creating your equity over time.
Landlords provide a service to others in the community just like any business. And just like any business there are several streams of income. Unfortunately the Govt. see’s fit to constantly interfere in that and many other businesses.
You need to sort out in your head the difference between speculators and investors. Investors being those that remain for longterm.
If you are going to tax capital gains are you going to allow capital losses?? Very important question about fairness. Think about your answer but don’t forget to tell us your answer.
Vote:July 16th, 2011 at 9:00 pm
Of course I agree that if realised capital gains are taxed then realised capital losses should be tax deductible. That is why having a CGT actually decreases risk for a business – they at least get a tax loss if it doesn’t work out. However, on average capital values rise so the govt still makes money out of such a CGT.
If landlording is viable then all the income streams should be taxed whether they are income or capital – just like the whole of my salary is taxed! If a lot of landlords pulled out the business who would be hurt? You can bet the houses wouldn’t sit empty!
Vote:July 16th, 2011 at 9:13 pm
Apparently Labour’s policy would allow for accruing a capital loss over the fiscal year. On the face of it that would seem fair.
However… If they are only going to levy the CGT at disposal the interim gains and losses are surely meaningless and would not need to be accounted for.
So perhaps this suggests their “detail” will see a CGT that is levied on an annual accrual basis. Perhaps those who invest in anything other than art will see their paper gains taxed each year – well before they actually realise any of those gains. Call it a land/property tax.
Perhaps that is why Trev doesn’t want to delve into the details…
Vote:July 17th, 2011 at 3:25 am
What I don’t understand is this constant charge that a CGT will “divert investment from housing (= evil) into productive business (business, exporters, employers, etc are suddenly good for this particular case)”.
For the rational person based on Labours stated CGT rules which of the following would you risk your investment in – given the incentive of a 15% loss on any possible gain plus the added joy of maintaining extensive & accurate paperwork for years plus dealing with IRD? (real world examples):
- Buy shares/unit trusts or precious metals – say 24carat gold bangles and stick em under your mattress?
- Buy a new CNC 4-axis mill for your workshop or that Beneteau Oceanis yacht?
- Employ a new young person in your business or go to the Casino hi-roller room?
- Build a new bunding and water control system to the stream running through your dairy farm or buy the wife those two appreciating paintings she loves?
- Subdivide off the rear of your section and build a new second dwelling or pour the money into your own existing house?
- Sacrifice & sweat & risk everything for years to build up your business or remain a sole trader/self-employed contractor?
- Float your company in an IPO or remain closely held private?
It will now be the second option under Labours CGT. In all of these cases I fail to see how the second option add’s more value/improves productivity for NZ Inc over and above the first.
Vote:July 17th, 2011 at 10:31 am
Capital Growth Tax.
Very good description.
After watching Cunnilingus on Q+A this morning here is the scenario for all of us who own a business and plan to sell to retire.
Business a is owned by Mr & Mrs ABC They have started from either a small beginning which they purchased or started from scratch.
They have been going say 10 years and are approaching retirement say 67 -68.
They decide to sell because Mr ABC or Mrs ABC have health issues as happens at that age and they have saved some money as well. They have invested in a couple of properties along the way .
Because they have not traded for 15 years they will pay capital gain tax, because they employ some 40 people they will pay Labours CGT.
The most glaring example though of hypocrisy with this policy was Cunnilingus and Little.
Its apparently about fairness to tax capital gains made in the above way. i.e. tax someones super fund but according to Mr Little now he has chosen a career change ( which is the same decision as selling ones business.), and will without doubt take his super fund with him he would be highly indignant if you asked him to pay CGT on the increase in the capital value of his unearned investments in his super fund.
So according to slimy Cunnilingus it’s about making at all fair.
So could some smart labour type (or one of their followers), please explain to us why they shouldn’t pay CGT on their superannuation funds.
Will CGT be applied to ACC ,EQC, NZ Super Fund and more importantly Kiwisaver.
Applying it to Kiwisaver would be fair given that half the funds are supplied by employers customers.
The whole thing is a fail.
The only person on this mornings Q+A that go it anywhere near right was Nicholson. His point was that we need to stop spending so we can stop taxing. But no one noticed.
As for Morgan and Smith. AH why were they there??? Do they get paid by TVNZ for that contribution to debate???
Vote:Should be charged tax for their lack of insight and contribution.
July 17th, 2011 at 10:37 am
Anthony (383) Says:
July 16th, 2011 at 9:00 pm
Of course I agree that if realized capital gains are taxed then realized capital losses should be tax deductible. That is why having a CGT actually decreases risk for a business – they at least get a tax loss if it doesn’t work out. However, on average capital values rise so the govt still makes money out of such a CGT.
Oh Anthony, do keep up. They have stated that there will be no offset of losses. Imagine what it would have done to the tax take over the last 4 years. The Govt. is bordering on bankrupt now except the tax payers are forced to bail them out.
Vote:We would have been trashed if your pet CGT had applied.
July 17th, 2011 at 11:41 am
Might I humbly suggest that anyone going into apoplexy about the idea of a CGT being introduced in NZ should study how it works in countries such as the UK and Australia? You see, it can hardly be said to be stifling entrepreneurs in either.
In Oz there is a 50% exemption for all assets owned for over a year. So where you have “investors” trading shares and making gains, which makes the gain more like an income, the gain/income is taxed. But for long-term holdings, the gain is halved automatically. In the UK, there is an inflation adjustment for business gains (this used to be allowed for individuals, too), so any gain is only taxable where it is in excess of the increase in value that would have occurred anyway through inflation.
In the UK there is a tapering relief known as Retirement Relief, giving relief for a business sold on retirement. There is also a Rollover Relief: where a businessman sells one business, makes a gain, but rolls the money over into a new business, what’s rolled over is not subject to CGT.
In the UK there used to be an annual exemptions as well, though I’m not sure whether or not these still exist. Ten or more years ago this was equivalent to close to NZ$20000 at the then existing exchange rates. So the first $20000 of gains would be CGT-free.
Of course, in both countries an exemption for the only or main residence: it doesn’t apply on one’s own home.
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It is very hard to argue against the principle behind a CGT – why should people be taxed only on income from their work and not from pushing their valuable pieces of paper around? This is why most sophisticated economies have a CGT.
I’ve always thought that sophisticated economies also have a suitable chunk of earned income which is not taxed, the first…however much. In Australia this is about A$6500 (over NZ$8000) but will increase to, get this, A$20000, in a year or two. In the UK, the level of tax-free earnings is approximately NZ$13000 and the threshold is increased by inflation every year.
In NZ the very first dollar earned is taxable. But there is no CGT. Isn’t this an appalling state of affairs? In NZ, even the lowest-paid income earner is taxed. But the ‘investor’ isn’t. I rest my case.
Vote:July 17th, 2011 at 11:55 am
Addendum: in NZ, there is an income tax exemption where total earnings are less than $9880. But you can only claim this tax credit for every week that you worked for 20 hours or more. Earning more than that, it’s all taxed – the very first dollar earned is taxable. In NZ, then, there are all sorts of fiddly bits of legislation to get even the lowest paid earners paying tax. But there’s no CGT. Whereas in the UK and Australia, the tax-free levels of earnings are inviolate.
Vote:July 17th, 2011 at 1:12 pm
Having to change tack are we now Viking. I never said I agreed with Labour’s CGT. Anyway, the principle should be if a realised gain is taxable then a realised loss should be deductible.
Most of the losses of the past few years have been lost deposits in finance companies so wouldn’t qualify as deductible or non-realised losses because no one likes selling their assets at a loss, so I don’t think a CGT would have left the government bankrupt at all – but would have been another automatic stabiliser for the economy.
Really, it was not normal or desirable to have every middle class man and his dog being a landlord for tax reasons – and had they not got into the game then the rental market would have continued in much the same way as it did before landlording became so popular!
Vote:July 17th, 2011 at 2:13 pm
Rodney is both a shit business and tax advisor as shown here.
No complaints about the tax on unrealised capital gains on Foreign Investment Funds I take it ?
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