Early next year, the Tax Working Group will deliver its final report to Cabinet. That report will contain a series of recommendations for reform of our tax system, including any details on a proposed capital gains tax. Once Cabinet receives the report, it will have to decide which recommendations to implement and campaign on heading into the 2020 election.
One important detail for the Working Group (and Cabinet) to consider is how to initially value assets for the purpose of taxing any capital gains. Since the capital gains tax is not intended to apply retrospectively, any asset potentially subject to the tax will require an official value as of 31 March 2021 – valuation day or ‘V-day’, the day before the tax is expected to be implemented.
Valuing those assets is an enormous – and expensive – task.
Every single rental property, commercial property, and business will need to be valued. There simply may not be enough qualified local valuers to assess the hundreds of thousands of properties pulled into the tax system overnight.
While valuation is simple for publicly listed companies (the implied value is derived from the share price) valuing private companies is more difficult.
Some businesses – think real estate agencies, restaurants, and tech start-ups – are notoriously difficult to value. Much of their value is derived from the particular mix of skills of their employees.
For example, a restaurant owned by Gordon Ramsey might be worth far less in the hands of a bad chef. But how accurately can a valuer make this distinction?
This ambiguity creates real problems: if the business is over-valued on V-day then the Government receives less tax revenue than it should, but if it’s under-valued then the owner is forced to pay more tax than they should when the restaurant is sold.
Using objective financial data like revenue or profit can also be complicated. While Xero has never run a profit or delivered a dividend to its shareholders, according to the stock market the company is worth $5 billion. How can we accurately value a company like Rocket Lab, which neither runs profits nor is publicly listed?
Valuation is an art, not a science – and it can’t be rushed.
Like art, valuation will be expensive.
OliverShaw – a specialist tax advisory firm – conservatively estimates the cost of V-Day to taxpayers as $1.3 billion, although they claim the cost could run to $2-3 billion. Total tax revenue in the first year is only expected to equal $270 million.
Putting the cost aside, even completing valuation will be straining. Attempting to value hundreds of thousands of properties and businesses after the detail of the capital gains tax has been finalised, but before it kicks in, would be a logistical nightmare.
A better approach would be for the Government to ‘grandfather’ the valuation process, meaning capital gains tax reference prices are determined by the first sale of the asset after the tax is introduced. This would mean that only assets that have already been sold at least once after 1 April 2021 would be subject to the tax.
No V-day would be required and asset owners could be confident that capital gains tax would only be applied based on the price they paid, not the subjective valuation of an over-worked, over-stressed valuer.