Troy Bowker: Capital gains tax 'valuation day' will cost Kiwi businesses billions of dollars

If the Government manages to push through the recommendations of the Tax Working Group (TWG), the 450,000 or so small business owners in this country will be hit with massive compliance costs.

Small business, meaning all sole traders and including businesses with up to 20 employees, are the back bone of the New Zealand economy.

Their contribution to our economy is enormous. Together small businesses employ roughly 30 per cent of our entire work force and contribute roughly $65 billion to New Zealand's annual gross domestic product.

That's over 25 per cent of everything this country produces manufactures and sells every year.

In order to implement Labour's controversial capital gains tax (CGT), the TWG have proposed that every business in New Zealand must be valued by a professional valuation expert all on the same day.

This is not only ludicrously impractical, if not impossible, but the cost to be piled on businesses to comply with this will be horrendous and in some cases crippling.

The compliance costs forced upon small business will run into the billions – I estimate $10,000 on average for each small business, meaning $4.5b of costs forced upon them by Labour tax policy.

These are our businesses that can least afford this cost – their profit margins are already being squeezed by the multitude of other costs they are facing today with wage increases, fuel cost increases and impact of our dollar falling on importers.

Exempting the family home from CGT, but hammering our small business owners, is hardly going to be the magic pill to encourage a shift away from property into more productive assets as is Labour's grand plan.

The TWG is recommending that CGT applies to assets already owned on the date the law comes into effect.

Making CGT apply to assets bought after the tax becomes law is by far the easiest and fairest way to bring in the legislation. It avoids the messy and expensive exercise of coming up with a value for these assets.

This method is also fairer on taxpayers since the new tax only applies to assets bought after it's introduced so individuals and businesses know what tax they might be on the hook for at time they buy an asset.

New Zealand is a country of small business owners. These are the corner dairy owners, the panel beaters, the builders, the hairdressers, the local butcher and the local fish and chip shop who are in many cases earning just enough to pay the bills to keep their business going.

They also employ people who pay taxes and spend the money that keeps our economy going.

Let's consider for a moment how impractical and ill considered the TWG proposal is.

Imagine 450,000 business owners all rushing out on the same day to find a local business valuation expert to value their business.

Valuing a business is a far more complex and expensive exercise than valuing a house or commercial property. Sales data is not readily and publicly available for businesses in contrast to houses and commercial property.

The main asset most businesses own can't be seen or touched because it's the intangible goodwill tied up in the owner's expertise and knowledge, making it a very hard asset to value.

I don't know the last time Sir Michael Cullen and fellow TWG members tried to get a business valued but I can tell you through many years of experience, it is a complex and expensive exercise.

For a start, there are only a handful of professional business valuation experts in most New Zealand towns and cities. Also it's not cheap to hire a professional business valuation expert. 

In most cases, you won't get any change from $10,000 and in many cases it will be much more than that.

Prices for this service will sky rocket. And small businesses will be forced to pay the bill – and the tax when they come to sell their business.

Successfully implementing a major reform to our tax system is a notoriously challenging and politically dangerous exercise.

All previous governments that have looked closely at introducing a CGT have walked away from the idea once they realised the minefield of issues they had to navigate to both design the tax so it is fair, easy to understand and not too onerous on taxpayers to comply with.

This dilemma is exactly the position the TWG finds itself in now.

But that is not justification for suffocating the 450,000 small business owners of this country.

The impact on this group will be enormous, disproportionately larger than on big business.

The TWG needs to gets real and come up with a workable and inexpensive way to implement its proposals or tell the government it can't be done.

Capital gains tax may once again be destined for scrap heap. And perhaps that's where it should stay.

Troy Bowker is the chief executive of Caniwi Capital. This article was first published on Stuff HERE.