UHY Haines Norton Managing Director Grant Brownlee considers the implications of a Labour government introducing Capital Gains Tax.
We recently asked Labour’s Phil Twyford, MP for Te Atatu, whether Labour would introduce a Capital Gains Tax (CGT) if they are elected. Phil indicated a CGT would be introduced within the first 100 days of their first term.
So what might a CGT look like in New Zealand? To provide an answer to that question I thought it would be a good idea to look across the Tasman and pose a few questions to Bill Charlton, a Partner from UHY Haines Norton in Brisbane.
Question 1: When CGT was introduced into Australia, what impact did it have on the property market?
When CGT was introduced, and in its first one or two years, it had very little influence on the property market at all. There were two main reasons for this. First, prior to the introduction of CGT, Australia already had a system of taxing property transactions where the property was sold within 12 months of its purchase. This was deliberately done to eliminate any debate about whether a sale was of a revenue nature (and taxable) or of a capital nature (and not taxable). So, short term property transactions were already caught in the tax net. Investors were aware of this tax and had already taken it into account. The CGT rules merely replaced these existing rules and CGT had no impact at all on short term sales.
Also, in the early years of CGT, many of the transactions involved properties that were not covered by CGT, i.e. “pre-CGT”. Any sale of an asset which was owned prior to the introduction of CGT did not trigger CGT. As most of the sales in the early transitional days of the CGT regime consisted of these “pre-CGT” properties, it is easy to understand that CGT had little impact on the property market during the first few years of its operations. (Note that after nearly 30 years of CGT regime, there are not as many “pre-CGT” assets. Now, CGT has a much greater impact on the property market.)
Unfortunately in Australia, CGT was introduced in September 1985, but the legislation was only passed in May of 1986. Given that our year end (30 June) was close to the day the legislation was passed, it is easy to understand that there was considerable anxiety amongst taxpayers about CGT, and whether or not CGT would have an impact on a June 1986 transaction. To be fair however, this had more to do with the uncertainty of not having legislation, and not to do with the actual legislation itself.
Question 2: How much of an issue was the additional compliance burden on small business?
The compliance burden was very significant for all taxpayers, and not just small businesses. It still is. Three examples immediately come to mind, but there are many more. These were relevant in 1985, and are still relevant now.
The biggest burden is the sheer complexity of CGT. The definition of a CGT asset is very wide indeed. It covers intangible as well as tangible assets, and it would be fair to say that many CGT events relate to assets which one would not expect to be subject to CGT. Understanding the width and complexity of this new law was and remains a huge burden to all businesses.
I do not know how long New Zealanders are required to hold documents. In Australia, we are required to hold records for 7 years (sometimes less – depending on circumstances). However, the sale of a CGT asset has a calculation that involves the sale price and the cost price. The sale price is not difficult for compliance. But it is often the case that the asset was purchased more than 7 years ago. So, even though a taxpayer technically does not have to hold those records, if one wants to establish a cost price and prove it to the revenue authorities, then everyone needs to change their regime for holding documentation for assets that are held for more than 7 years.
The situation becomes a big problem where the taxpayer is trying to prove that the asset was owned prior to the introduction of CGT. It is quite possible that the asset was purchased more than 7 years ago already. Therefore, the taxpayer already has no documentation. At the introduction of GST, we found it very useful to attempt to document the cost and acquisition date of many of the pre-CGT assets.
Another feature of CGT that has caused a burden for everyone surrounds the timing of a sale or change in ownership. For the majority of “normal” and non-CGT transactions, profit is recognised and becomes taxable at the time that the invoice is rendered or the delivery is made. This varies according to the situation, but is totally different for CGT. A CGT sale or change in ownership occurs when the contract is executed. For example, with property transactions, this can occur 30 days or more prior to the date the contract is settled and title in the property passes! Initially, many taxpayers were caught out with contracts that traversed a year end. That is, they executed a contract in one year, and expected to have a CGT event when the property passed to the purchaser in the following year, only to find that the CGT event arose in the previous year.
Question 3: What impact did CGT have in the boardroom?
CGT has a huge impact in the boardroom. I suspect that there is not one decision that relates to capital expenditure, future directions of a business, or the sale of an asset or a portion of a business, which does not involve some discussion of CGT and its impact on the transaction or strategy. I mentioned earlier that the single biggest compliance burden of the CGT is its complexity. After nearly 30 years of living with CGT, we find that understanding the impact of CGT on the business is a fundamental part of any decision-making process, and is as important to the process as risk assessment and sensitivity analysis.
Question 4: What is the worst thing about CGT?
I would have to say that complexity is the worst thing about CGT. During the 1985/1986 taxation year, the entire focus of Australian tax accountants was on one thing and one thing only – CGT. My diary for 1985 and 1986 (yes, I still have them) is littered with professional development seminars for CGT.
In Australia, the CGT rules were introduced in 1985. At that time, the CGT legislation increased the size of Australia’s tax law by a factor of at least 50%. Then, the entire body of CGT rules were re-written in 1997 in an effort to simplify the legislation!
But, looking back on those early days of CGT, one item that was particularly difficult to deal with were the transitional provisions. A truism of taxation law the world over is that first there is a rule. Then there is a concession or an exception to the rule. This style or approach is consistent amongst many tax jurisdictions, and tax advisors are now used to that process.
However, with the introduction of such a wide ranging and significant tax as a CGT, the taxpayers also have to deal with the transitional rules. These transitional rules add an extra layer of complexity to taxation, and while it was necessary, many of us thought that there must have been a simpler way to handle the transition to a CGT environment.
Question 5: What is the best thing about CGT?
It is particularly difficult for a tax accountant to say that there is anything good about a tax! But if there was one thing that immediately comes to my mind about the Australian model, that is the concessions on CGT for small business operators.
For many small businesses, the equity that they build up in their business and the goodwill that they establish represents their superannuation. There is no long service leave, and often no superannuation entitlements, and definitely no redundancy entitlements for small business operators! If the revenue authorities were then to tax the small business operator on the gains from the sale of his or her business, then that would leave a significant hole in their retirement planning or their plans to move on to another business.
The CGT concessions for small business owners firstly do not levy any tax at all if the person has operated his business for 15 continuous years. Then the CGT can be reduced by any or all of:
- a 50% discount;
- the amount that is contributed to the business owners’ superannuation fund; or
- the amount that is reinvested into a new business.
The ramifications of not having these concessions would have been a disaster for the small business community within Australia.
If you would like to discuss any of the information in this article please contact Grant Brownlee at email@example.com.