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Bill Ralston: Curses upon the capital gains tax proposal

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Out here in small-business-cum-saver-land, the proposed capital gains tax is a gloomy prospect.

Curses upon Sir Michael Cullen and his Tax Working Group. They are giving me nightmares, not so much for what they are proposing, but because I cannot accurately assess what my personal liability would be if their recommendations are made law.

I suspect there are, despite the efforts of the media to pick apart and appraise the proposals, many people trying to get to grips with the implications of the working group’s report on the proposed capital gains tax (CGT). I hasten to add I am not a complete cretin in money matters. I did economics as part of my university degree and I handle tax issues for the small company that my wife and I own.

Let’s look at our business and savings and the effect of a CGT on them. We work from home and claim a proportion of the mortgage interest paid on our house as a business expense. Under the Cullen proposal, it would seem that when we sell the family home, it will be liable for CGT. Hang on – a CGT won’t apply to the family home, will it? Yes, it will, if you use the home for business and claim on that.

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The answer seems to be to stop claiming on home-related business expenses, although that means our small business will be carrying greater costs and our income will drop.

With a weather eye on our advancing age, we are also renovating the sleep-out on the property with the idea that, if we are reduced to eating cat food when we stop work, we can rent it out as, say, an Airbnb for a little extra cash. But the proposed tax takes the gloss off that plan. Too bad if you have to quit the property because your health requires you to be dragged off to a home for the elderly and bewildered: while you have been paying tax on the Airbnb income, you also lay the family home open to CGT on any increase in its value from when the tax is brought in.

Well, we’ll just have to work harder and pour more cash into the business to generate extra income. The problem there is 33% of any increase in the value of the business when you eventually sell it will go in CGT.

Thank heavens we have some savings. I’m over 65, no longer in KiwiSaver and have money in an investment fund. When we stop work, the investment dividends will provide a small National Super top-up. But hang on, the CGT on shares will inevitably impose a cost on the fund and reduce its value. Sob.

So, when the CGT comes in, should we sell our business, take the cash and run? We could, but the new tax would significantly reduce the proceeds.

My head hurts. Actually, that’s just as well because, somehow, it is suggested that a CGT will apply to intellectual property and it would probably be best if I simply stopped thinking to avoid getting any good ideas that are taxable.

Prime Minister Jacinda Ardern and Finance Minister Grant Robertson say they are looking at making the tax system, which they also admit is working well, fairer. In any case, Robertson says, the Government hasn’t made a decision yet about what happens next. That will happen next month.

All I can say to them is, as a pensioner and small-business owner, don’t make it less fair for me and others when you finally make up your minds.

This article was first published in the March 9, 2019 issue of the New Zealand Listener.