Accountants Hamilton, Chartered Accountants Nz Blog

Why I don't like Capital Gains Tax

5th September 2014

It is already evident that the property and business markets are holding their breath and waiting for an election result.  Many investors are waiting for some clarity on future taxes and policies before committing.   I’m personally sick of the elections and can’t wait for 20th September to be over.

There are some important tax, property and business issues to consider.  Let’s start with Capital Gains Tax.

The main issue I have with the Labour Party is the Capital Gains Tax (CGT), the confusion around the policies, plus it seems that many of the details haven’t been worked out.  From my point of view, a lot of the detail is going to get quite messy, and then it encourages tax payers to avoid it or to manipulate the system.  Dealing with CGT is going to be a large extra compliance cost for property investors, business owners and maybe even personal house owners.

Some of the questions I have are:

• How are properties physically going to be valued at the start of the policy?  Is this going to be an extra cost to property investors to get their properties all revalued?  Or are the rates values going to be used, which we all know can be extremely inaccurate!
• Worse still, how are the opening values of businesses going to be determined?  Full business valuations are very expensive and I know of SME’s paying $10,000 to get a business valuation at the moment for other purposes!  CGT on businesses is going to add a huge burden and cost to small businesses to establish the opening value of the business, so that only future gains are taxed.
• Family home is exempt?  But what if you have three boarders?  Or are using a part of your home for an office or business?  Would this then make a portion of your family home subject to CGT?  How much of your home would have to be rented or used for business for it not to get a family home exemption?
• Room to manipulate:
  - Valuations are subjective.  Will it be possible to get high valuations done at the start of the policy, so that when the property or business is sold (short term), a loss is made?  From my experience, this situation will be quite likely to be abused.
  - What happens if you have a rental for 10 years, then move into it for six months as a family home?  Is all the capital gains then exempt?    This is a possible loophole that a lot of property investors will look to use.
  - Or the opposite could be very bad?  What happens if you live in a family home, then it becomes a rental?
• Farms, lifestyle blocks and toy farms – All of these often include the family home, but how will the capital gain be worked out on the family home, so that it can be excluded?  Will a 5000sqm property be excluded, but a 10 acre toy farm have to pay full capital gain?  From Labour policy notes, the main farm residence and surrounding land used for domestic purposes will be exempt – again this just gives room for valuers to manipulate.
• Transferring assets to a Trust – From Labour policy notes, “Gifting an asset will be considered a CGT event”.  So very careful consideration would be needed before transferring a property to a Trust once CGT is implemented.  If you are considering a Trust and transferring business/ property to a Trust, then most likely it would make sense to do this before any CGT.
• LTC and companies – It is likely that a sale of shares would also be a CGT event. So careful consideration would be needed about the long term ownership of companies and LTC’s before CGT is implemented.  Transfer of shares from husband and wife may be excluded, but transfer to Trusts is a CGT event.

There are a lot of “ifs and buts” at this stage, and I see it being a huge cost of the Government to implement this (IRD doesn’t have enough resources as it is!).  I think CGT, as it is being imposed, creates a disparity between different kinds of investments.  It would encourage New Zealanders to invest further in a personal home as this is CGT free, or to invest in Kiwisaver over other kinds of investments.  In my opinion, if CGT is brought in, then it should be over all assets.

Losses

Unfortunately, these would be carried forward and could only offset against future capital gains and not against other income.

Property and Share Traders

Profit from share or property trading will still be a business and taxed at Company, Trust or individual tax rates.  So the same old avoidance issues will continue, but will still have confusion over what property sales are fully taxable or just CGT taxable at 15%.

Overall, I think the main items forgotten about Capital Gains Tax are:

• CGT is only due if you sell.  So long term property investors shouldn’t really be affected by this.
• 15% tax isn’t that bad, and it isn’t a reason to stop investing.  Say a business or property increased by $100,000 and is then sold.  The investor is still $85,000 better off after the CGT.
• For other countries, the introduction of CGT didn’t stop property prices increasing.

Next week I’ll discuss other issues such as the Top Tax Bracket, Trust tax rates, and Minimum Wage.

Getting started on the property ladder

28th July 2014

Are you looking to get ahead on the property ladder?

You might have some equity in your personal home, or already have an existing rental property, and you want to buy further rentals over the next 10 years to help to create financial freedom or a better retirement.

We can’t give you the magic answer to make you millions from property as there isn’t a magic/secret solution.  But we can give you simple information to help your investing and help you start looking  at the right kind of properties to assist you to get ahead.  Unfortunately many investors buy extremely negative properties that drag the investors down.  So having a good understanding of the numbers and how they work is extremely important.

This seminar is designed to help beginners and less experienced property investors. It will demonstrate the importance of having a plan and how it really does work!

If you are already an experienced investor, do you have friends or family who would benefit from starting to educate themselves about property investment?  This seminar has no sales pitch, and no hype, so just a great opportunity for your friends or family to learn about property and how it could work for them.

THURSDAY, 31 JULY 2014, 5.45 – 7.30 pm
LODGE AUCTION ROOMS, 931 VICTORIA STREET, HAMILTON
To register, click here

Lodge Rentals (David Kneebone), Priority Home Loans (Justin Mogford), Coombe Smith Property Accountants (Ross Barnett),
and Lodge Real Estate (Jo Harris) are working together to help property investors.

“My pet hate is seeing investors buy a property that costs thousands per year when they don’t have the cash flow to sustain this”
- Ross Barnett

This seminar is designed to help new investors understand more about property investment, so that they can buy the right property for themselves.

Hope to see you there.

Kind regards
Ross

How could some of the tax/election proposals affect you?

10th September 2014

Here are some more important tax, property, and business issues to consider before the impending election.

Top Tax Bracket

At the moment the top individual tax rate is 33% and this is aligned with the Trust tax rate.  Labour plans to increase the top individual tax rate to 36% on income over $150,000.

This is likely to affect just 2% of tax payers.  From a tax planning perspective, this is just going to encourage high income earners to look at options to get around this tax or to shelter their incomes in companies.

It is also interesting that this 2% of tax payers already pay 22% of New Zealand’s income tax.

The Greens are looking at a 40% top tax bracket for individuals earning over $140,000!

Trust Tax Rate

The current Trust tax rate is 33%.  I’m hugely disappointed to see that Labour plan to increase this to 36%.

Many business people and property investors have established Trusts to protect their assets and hold their assets/savings for retirement.  Putting in place a higher Trust tax rate is going to penalise these people for planning ahead.  It will also cause:

• Higher compliance costs for the Trusts through having more income distributions to beneficiaries to avoid the 36%.
• Higher compliance costs for IRD, as more Trusts will be trying to avoid this 36%.
• Goes against the whole concept of protecting assets through a Trust, as Trusts will be encouraged to distribute more earnings to beneficiaries.

The Greens would increase the Trust tax rate to 40%!

Minimum Wage

The current minimum wage for adults is $14.25 per hour.  The Labour Party is proposing increasing this to $16.25 per hour.
While this sounds great for low income earners, it could also make some low income jobs uneconomic and reduce the number of jobs available!  The National Party’s comment was that 6,000 people could lose their jobs as a result of this policy.

I hope this gives you something to think about before the 20th.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?