Capital gains tax ‘within 10 years’
New Zealand will have a capital gains tax on property within the next 10 years, according to an Auckland accountant, Mr Jim Hoare. Mr Hoare is a member of the tax and legislation subcommittee of the Society of Accountants' Auckland branch. He made the-predic-tion at a seminar organised by the Property Management Institute in Christchurch.
The purpose of the seminar was to examine the impact of an upcoming tax on investment property, effective from April 1. The provision requires that tax deducted for interest payments on money borrowed to buy land producing income be assessed for income tax at the time of the property’s sale should that occur within 10 years of the purchase date. Mr Hoare described the new tax as capital gains by stealth. Others have dubbed it a back-door capital gains tax.
With the introduction of the 1982 Budget, he said, the battle between the taxpayer and the legislator had entered a new stage. It clamped down on tax avoidance.
Tax shelters, once thought to be quite respectable, were apparently so no longer, he said. He attributed the change of attitude partly to the growth of the film industry with its no-risk investment opportunities, and partly to the high profile of some taxavoiders. The effect of the antiavoidance legislation would be to make 1983 the year of care, Mr Hoare said.
“Essentially it provides that if you enter an arrangement to avoid tax, you will be assessed for the tax that you would have been liable for if you had not entered the arrangement. “You may feel sorry for yourselves having to operate in this kind of environment,” he told the seminar. Mr Hoare said that over the last 10 years, the net had tightened on property investment and that he ex-
pected a capital gains tax within the next 10 years. The response to the Budget provisions had been twofold, he said. Some. had simply refused to believe it; others were confident that new tax shelters would be found. However, he said, the Government had shown that it was “not scared of retrospective legislation" and that any gaps in the law would probably be filled as they were discovered. The interest-recapture clause would not only affect property investors; it would catch “innocent passers-by." Public servants on transfer who rented their homes would be liable to pay the new tax if they sold their properties within 10 years, he said. So would small businessmen.
“Joe Bloggs the panelbeater,” if he owned his premises and had deducted interest payments on his mortgage from tax, would also be required to repay the tax if within 10 years he decided to sell up and buy a larger workshop, Mr Hoare said.
He offered some hope to those claiming for an office in their homes, on a technicality that he would not divulge.
Those who owned property and sold it for more than they paid for it were fair game politically, he said. They represented a small minority of taxpayers. A straight capital gains tax, with deductions for loss, would be preferable. Under the present system these were limited to
$lO,OOO for each taxpayer, which was unfair.
One means of avoiding the new tax, Mr Hoare said, would be to pay for real estate out of equity and borrow for chattels.
Another might be to arrange for a credit package heavy on borrowing costs and light on interest payments, or front-end loading. He also suggested that investors form a separate company for each property and sell the shares instead of the real estate. However, he said, the scheme would probably not be attractive to buyers. A Christchurch lawyer. Mr J. R. Fox, also addressed the seminar. He said that the tax avoidance provisions, reflected a general belief that it was unfair that tax shelters should be available to some but not to others.
However, the long-term effect would be to discourage enterprise and the “Queen Street farmer.” The impact on the horticultural industry-would be bad, he said. There might be a drift of funds from the country to the town. Businesses might avoid the new tax by buying property with money designated for. the Inland Revenue Department, raising a loan to pay the tax bill, and claiming the cost as business expenses, Mr Fox said.
Both speakers emphasised that their comments were made in a general context and should not be applied in individual cases.
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