By Geoff Simmons*
The Tax Working Group is open for business, and will start taking submissions in two weeks. But is it even worth the bother of submitting when the biggest loophole – the family home – is ruled out of contention? And what is the family home anyway? The family home is sacrosanct as far as politicians go, but from a tax perspective the concept is meaningless.
When Labour first raised their review of the tax system, including the treatment of assets, they explicitly excluded the family home. Most Kiwis seemed to nod in agreement with that concept. We seem to buy into the idea that certain things are a sacred part of the Kiwi dream and therefore shouldn’t be taxed. We don’t want to tax the family home; at least any more than we already do through rates. But taxes aren’t based on ideas of what is sacred (unless you are talking charities, which is a whole other can of worms), they are based on black and white rules. How does the concept of the family home stack up?
Most of us have an idea of what we mean by the family home; most of us lived at one at some stage, although for younger generations that was probably as a child rather than now. But do we all have the same idea of the family home?
The average Kiwi family in Palmerston North for instance, living in their $365,000 house, are no doubt happy to keep that tax free. But are they happy to give the same free ride to the Aucklanders living in posh suburbs where the average price tag is now over $2m? Let’s take it to the extreme, the most expensive “family home” in Auckland is Deyi Shi’s (of Oravida fame) place in Orakei, valued at $46m. Are we happy for that “family home” to sit outside the tax net?
You can see the problems this starts to create. The incentive for Mr Shi would be not to buy his next property in Waitakere or Te Kuiti, but to buy the place next door and put that on the same title, so it is all tax free. It wouldn’t matter what he did with it, he could extend his house, use the existing house as a granny flat or knock it down and put a tennis court or pool or two on it, it is all tax free land banking.
Prime Minister Jacinda Ardern famously promised not to tax the family home, nor the land under the family home. What about the land around the family home? Surely Labour wouldn’t tax a modest section? Alan Gibbs no doubt thinks his sculpture farm fits that category. I can see the arguments on that one lasting for years.
Next up will come the bach. Surely that won’t be taxed. Surely. Isn’t it just an extension of the family home? Nobody owns a bach to make money.
And what about the family farm? If you aren’t going to tax Mr Shi and his $46m home, why would you tax a “family farm” worth less than that? It would be blatantly unfair. Besides, where does the family home end and the farm begin? Do you exempt the bits that you mow rather than get cattle to graze?
Again, think of all the boundary issues this creates. If we exempt the family farm there will be a massive incentive to buy the farm next door and add it to your own. Can the family farm extend across the road? If not, why not another farm a few minutes down the road?
Taxing the family farm would raise the ire of the farming lobby. After all, a large proportion of farms are subsistence lifestyle businesses banking on a tax-free capital gain windfall at the end of it all. Combined with removing foreign buyers from the land market, it could send rural land prices into freefall.
Once family farms get their inevitable exemption, all family and lifestyle businesses will quickly follow suit. Anyone living where they work will be looking for a way to get around paying tax. Countless businesses only exist to ensure their owners have high quality of life along with minimal cost of living and a minimal tax bill to boot. These types of businesses are probably the biggest tax loophole we have at the moment, and will surely find a way to keep wriggling out of paying their fair share of tax.
And finally in the age of blended families, how do you define the ‘family’ in family home? What if I meet a partner who like me already has a house? Do we now have two family homes? What if I have six homes and gift them to my children or grandchildren as their family homes? Would the tax system smile upon this massive leg up I am gifting the next generation?
Very quickly motherhood and apple pie concepts like the “family home” turn into yawning loopholes that make a mockery of our tax system. We have seen this time and again overseas with wealth and asset taxation – loopholes designed to protect the middle class end up being exploited most by the rich who can afford an accountant to find their way around the rules. The only people who end up paying such taxes are Mum and Dad investors who don’t have an accountant, get caught unaware and end up getting stuck with a massive bill.
The final question is why do we favour the family home so much? What about someone who wants to create a business that employs people and actually uses their money productively? What about someone who wants to build up assets and spend their life travelling? Why don’t they get a tax break?
A much fairer resolution would be to ditch the concept of a family home and give each adult a tax-free amount of assets. How much do you want tax-free New Zealand? Half a mill? A mill? Two? Is that enough for your share of the Kiwi dream?
Before you answer that, just bear in mind that 40% of the country owns nothing. Not a sausage. Well, maybe a sausage, but they need to eat that sausage tonight. Yet many of those people are paying more tax in percentage terms than people who are asset rich (with family homes, family farms and family lifestyle businesses), but arrange their affairs to have a low taxable income.
Is that fair? No, it’s not. No tax break is fair. Not if we care about equity and the efficiency of the tax system.
So if you are submitting to the Tax Working Group, if you can be bothered screaming into the void in such a futile manner, I suggest the first line of your submission is this: “Your terms of reference are a sham.”
*Geoff Simmons is an economist and former co-deputy leader of The Opportunities Party.