By Mike Chapman
OPINION: The report from the tax working group, including the merits or otherwise for a capital gains tax, has been made available to Government, and is due for public release later this month.
As the tax working group did its work, Horticulture New Zealand, along with all the other primary sector organisations, made comprehensive submissions on the proposed new taxes.
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In Federated Farmers' case, this was supported by robust economic analysis.
The central question that was asked was, why do we need to change New Zealand's taxation system? Do we need more tax money for the Government's programmes? Is there unfairness that needs addressing? Are there better ways to run our tax system?
These questions will, hopefully, be answered in the final report.
One proposal that we uniformly opposed, and submitted against strenuously, was the introduction of a capital gains tax. This is because the value of land used for primary production is the key ingredient for the lending of money to support that economic enterprise. Any reduction in the value of land will quickly translate into less funding being available to support growth and the financial viability of the enterprise.
In other words, economic activity would decrease.
As a matter of equity, if a capital gains tax were to be introduced, other taxation methods such as company and trust tax would need to be greatly reduced. Not only that, but equity would need to be somehow maintained between businesses with little or no land, and those that rely on land for their production. Moreover, local government in New Zealand currently uses land as the basis of tax, via rates, raising over $5 billion in revenue in the year ended 30 June 2016; how, exactly, would equity be achieved here?
Capital gains tax would also likely drive down property prices, decreasing the potential tax take. A recent survey conducted by Lincoln University indicated that pastoral farming would be unlikely to generate significant tax under this system.
The survey found that:
Annual returns on farming investment are very low (between 2 percent and 3 percent). For this reason, capital gains from a farm sale are virtually non-existent after allowing for inflation.
If a capital gains tax is only to be realised on a property sale with inflation adjusted, then this will just turn into a lot of paperwork, and still result in little or no tax.
Going back to the principles for a robust and equitable tax system that the tax working group stated as their guide, my view is that a capital gains tax does not meet the following tax working group principles:
Efficiency where impediments to growth and distortions are avoided.
Equity and fairness including procedural fairness.
Revenue integrity minimising tax avoidance and arbitrage.
Minimised compliance and administration cost and give certainty to the taxpayer - particularly between different type of tax payers.
New Zealand needs better.
Mike Chapman is CEO of Horticulture NZ