C G Tax would make farm ownership more difficult

C G Tax would make farm ownership more difficult

Coal face commentators views on what effect a capital gains tax will have on the agricultural community should be listened to, especially when one is leading farm accountant Pita Alexander and the other top farm adviser Andy MacFarlane.

Their comments that this tax will do nothing to achieve its goals and may indeed speed up changes of farm ownership from the family farm to more corporate involvement are revealing.

The family farm is a key driver in NZ agriculture and succession systems set up for the new generation are interferred with at peril for the future of agriculture.

Operators reinvest in their farms for the future generation, and allow the business to grow and insulate itself from market or weather fluctuations, but with a tax disincentive why would they bother. Historically the return on investment in farming has been poor world wide, and it is only when coupled with some capital growth that owners can justify their investment.

Political parties should be creating policies that encourage the growth in agriculture and the flow on effect to the NZ economy, not create disincentives for reinvestment. Your views?

Labour's new tax policy will make farm succession harder and and put land ownership into fewer hands, farm consultant Andy Macfarlane says. "We have seen that in the UK where intergenerational transfer has been extremely difficult. What families tend to do is hold onto the land until they are very old, but they stop farming it and you get big corporates farming land owned by multiple families."

The policy would set at a flat rate of 15 per cent with no indexation for inflation reports The Central Farmer. The main residence on a farm would be exempt from a CGT, but not the land. It would also deter the next generation of farmers striving for farm ownership, Mr MacFarlane said. When retiring farmers sold their farm, the price they received would be the only superannuation they received and the price equivalent was often no better than a good super scheme. Land values responded up and down to the availability and cost of credit, optimism to the future and investment that increases productivity.Those three things drove land prices and were more important than the tax impact on land as a storer of value, he said.
"The perception that putting a CGT on is suddenly going to make big behaviour changes, I don't think is necessarily correct."

Well-known Canterbury farm accountant Pita Alexander said a CGT had been promoted as being easy to manage but it would not be. "It will be complicated, slow to produce much real tax income for the Government and will increase incomes for all accountants and solicitors, probably indefinitely." NZ had three world class industries in dairying, tourism and sheep and beef farming. It was unfortunate that all three of those industries involved substantial land values in terms of a potential CGT, Mr Alexander said.

He doubted, based on worldwide evidence that a CGT would improve the distribution of capital so that it would improve productive investment for New Zealand as a whole. He also doubted it would fix NZ's farmland and housing shortage. "NZ farmers' production output has been affected by climate, prices received and costs. Lower interest costs which a CGT may bring about in time may improve profitability, but the production output is already high and still increasing gradually."

Real care was required in ascertaining what effect a CGT would have on New Zealand's land based export sector. Very few of other developed countries with a CGT would have this particular export and economy `mix', he said.

Federated Farmers national president Bruce Wills said a CGT would act as an inhibitor for farmers thinking of selling their properties. "I imagine with human nature you would be encouraged to hold on to your property as long as you can to avoid paying that tax. I'm not sure that's going to be useful when we need young, keen guys coming into farm ownership."

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Well this is too logical and too common sensical for the poltics of envy- the only rational for a CGT is that it wil succeed in collecting revenue and if that was the main reason, then family homes would not be exempted.. and like most things beware of unintended consequences

...for a nation to try and tax itself

into prosperity is like a man standing

in a bucket and trying to lift

himself up by the handle

Winston Churchill (1903)

But LabourGreens Know Best !

Well you've got to hand it to Churchill; he certainly had a way with words. And of course he's absolutely right! You cannot tax your way to wealth and prosperity.

I also like this bit said by Pita Alexander:-  

He doubted, based on worldwide evidence that a CGT would improve the distribution of capital so that it would improve productive investment for New Zealand as a whole.

And he’s correct. And anybody who suggests otherwise is either naïve, perverse or being deliberately disingenuous to advance their own political agenda.  

you could also correctly write 

For a nation to not tax its people into wealth and prosperity would be to stand on a bucket.....

Oh the wisdom of Churchill

In quoting Pita Alexander can you give us your meaning of his words for I fear you can read and understand nothing both at the same time.

Spoken like a true leftie lost in the politics of envy.  You fail to be convincing.

I didn't think you'd be able to explain Pita's message and I was correct

The meaning of his words is self-evident and requires no 'explanation'. And I'm certainly not going to give one to you as you're just being childish.

"He doubted, based on worldwide evidence that a CGT would improve the distribution of capital so that it would improve productive investment for New Zealand as a whole"

"He doubted" - personal opinion

"based on worldwide evidence" - nothing cited i.e. in-spite of being an expert there is no evidence to his statement that he can quote or point to

he didn't think "CGT would improve the distribution of capital so that it would improve productive investment for New Zealand as a whole" - the statement

The statement is talking about distribution of capital (money, land ext..), to improve productive investment for NZ as a whole.

 

Now I disagree with this statement David because I think that if you have CGT then the assets which are effected would be worth less, therefore the prices will come down, therefore young NZ'ers eager to give farming and other enterprises ago will get more of a chance.

People whom can see ways to add value to the capital output chain are not able to get into the market based on high entry points and this is limiting our countries income.

Now I'm not an old accountant with 1000 old family friends who own farms that have been passed down from father to son/daughter but obviously he has his angle and interests to look out for and they are not necessarily in line with the interests of our country.

 

Tony Chaston "Historically the return on investment in farming has been poor world wide, and it is only when coupled with some capital growth that owners can justify their investment".

Well, of-course this is true, where ever you have a profitable business you also have a business owner/s hiding behind tax dodges claiming poverty.

The reason why farms are not profitable is because the land they operate on is over priced / the reason why the land is over priced is because farmers don't want to make an honest profit on output they want to make the profit on capital gain.

It's the same with investment property for rental with the aim to drive the value of capital value high / the rent doesn't cover mortgage / owner claims loss of income against other taxable income / owner claims poverty and pockets his tax free return when they sell the property.

I'm sic of hearing all the excuses to retain the current system because the truth is that property investors are routing the pocket of myself and everyone else who seeks to buy a house to live in as well as not paying their fair share of tax.

Roadhouse Blues When will the poor me 'its not fair" brigade realise that the problem is profiligate politicians not prepared to cut their cloth.

Our farm does not have much debt and this year is the first year I can remember in 40 years where we will have excess funds that will not be ploughed back into maintaining our property.

Farmers are at the end of the cost + spiral and are not able to pass inflated costs on to some one else as has been the case for ever and day. Gross incomes have been well below the takings of a small retail sports store. But working expeneses are well above. 

Please Goran,  this isn't the venue for Poor Me.

For something to be sustainable for NZ it needs to be sustainable not just for grandparents but also for parents, their children and future generations so I'm of the generation that thinks our elders (and in some cases betters), shouldn't have it all their own way.

I guess Government is easy to blame (personally though, I think banks have more skin involved), but just look at all of our educated young traveling overseas and tell me that the barriers to home or farm ownership are fair for everybody under the current system which rewards farmers like yourself for capital gain instead of productive gain.

With the sports store example you mention can the store owner claim his wife's Land Rover as a business expense. Does he make a profit or loss based on turn-over and margin, or, is the profit or loss somehow a stored value (like property is), which miraculously appears when he retires or sells out?

I have to disagree, your comments are of "poor me" mentality. Your comments show that you have no idea of a farmer's business. Regarding the wife's Land Rover claimed as a business expense, have you not heard of FBT?

What do you mean by sustainability? 

Many of those 'educated' young travelling overseas are not leaving because of no CGT they are leaving because they have become more skilled than their superiors who ensure that there is no place for them in their particular profession. e.g. Medicine.

And because they having not been educated at an elite school also counts against them.

It's not what you know but whom you don't know that sends them off our shores.

 

 

Don't overlook the fact that National/United already have a CGT on (basically) family owned farming companies - it's a tax relic reactivated by the demise of QC's, is unjust, and needs to be sorted out - and given the political will to achieve some fairness here, could easily be done so. Note this even captures selling livestock that are on the Herd Scheme to related parties.

Also, re the comment on the farm house being exempt, above, David Parker's comments over the weekend would lead me to thinking Labour's CGT would apply to 25% of the farm house as well.

An opposing view:

Capital gains tax to aid young farmers, by Gerry Eckhoff.

http://www.ruralnews.co.nz/Default.asp?task=article&subtask=show&item=14936&pageno=1 

Who is this Gerry Eckhoff anyway?

Good to see this totally objective commentary from those in the farming sector.  Clearly disinterested and unbiased analysts thinking only of the best interests of the country as a whole.  Its nice for a change to see balanced contribution with absolutely no signs of self-interest. 

Darn Bernard, just when are you going to provide that "sarcasm" font!

Cheers to all.

 

I'll put my hand up and say I'm not a huge fan of CGT although I'm sure our Rural financial landscape over the last 6 years would look significantly different if it had been in place.

My main reason for commenting is that Pita Alexander has failed to mention a huge conflict of interest in his commments in that he has well in excess of $10m borrowed in relation to rural holdings.

Just saying...

Farming interests have been vociferous supporters of a taxpayer-funded broad-band scheme for rural areas.  This has taken a lot of their energy.

And you actually expect them to pay an equitable share of tax as well??!!

How unreasonable can you get!!

Cheers.

I also as a farmer, think that lower land values would make farm succession much easier. I don't see how CGT benefits corporates as they often advertise the fact that the money made is CG and tax free. Besides the biggest farmer is the government. In my experience the high values have made it nearly impossible for young farmers to buy siblings out, and creates an unrealistic  asumption of wealth not related to earnings.  I dont see why a well planned trust shouldn't be able to solve many of the issues with a CGT, however the CGT not being inflation adjusted is a bit unfair.

 if ITYS is correct, and he has 10 million borrowed against farms, then he is the perfect example of non farmers speculating on an asset with a very poor return, inflating land prices to unsustainable levels based on the floored asumption of capital gain, tax free for ever more.

I would have no problem with a CGT if it were to have no exemptions. I see no reason at all to clobber farms and businesses while exempting the majority of residential houses. If its a good idea do it for everyone dont just make it a tax against productive assets. Goff wont have the balls to do that.

AJ, why do you assume Pita Alexander is getting a very poor return on his alleged farming investment? You will be aware that land prices have dropped significantly in recent years at the same time as returns from farming said land have improved dramatically. Meaning its quite probable that his ROI is extremely competitive with say a bank deposit, with no capital gain required.

Every year we are cold called by real estate agents re selling our farm.  The buyers they have lined up are not usually kiwis, they are usually Europeans or sometimes the likes of MyFarm.  Every year they get the same message - it's not for sale.  Doesn't stop them from ringing again and asking the same question to get the same answer.

We should be concerned at these 'corporates' now buying in to family farm sized farms. This will be a real barrier to young farmers progressing.  Having said that I know of young farmers who have gone on to buy their own farm - and not indebted up to their eyeballs.

Capital gains tax is in force in both the UK and Canada where I have family connections.  It hasn't resulted in farms in those countries being more acheivable to young farmers. In fact family in both those countries tell me that unless you inherit land in either of them it is almost impossible for young farmers to ever own their own farm. How would a CGT in NZ create a different outcome - because we are different! Yeah right.

 

 

"How would a CGT in NZ create a different outcome". is a very good question C.O.

If I can try to answer and I'm not a farmer or a accountant.

Firstly having a CGT wouldn't make entry into farming that much easier for the young but what it would do is change the goal of the investment.

If the goal is to make a profit then the cost of capital (land, vehicle, machinery ext... ), has to provide a dividend on which tax is paid. i.e. $1,000,000 farm returns 6% = $60,000 as income after expenses (which include wages), taxable income from farm on the investment is $60,000 per annum. At the end of the year the farm is worth $1,000,000 This would seem fair.

If the goal is to make a profit on Capital Gains then I imagine the equation looks more like capital (farm, machinery ext....), =$1,000,000 no return on capital (not applicable). At the end of the year the farm is worth $1,060,000.

In both examples the return on capital and wages are factored in and the difference is that when you want to sell the business at the end of the year you talk about the benefits of capital gain and paying no tax (tax free profit), to the new owner on their new investment.

Having CGT would create a different outcome because people who can see ways to add value to the capital output would get involved.

RB: I am a farmer - what I call a genuine farmer, compared to a non farmer farming investor. 

If a young farmer is going to buy their own farm, believe me, the vast majority are not doing it because of capital gains - they are doing it for for the reason that that is what they want to do.  Just as accountant/lawyers mechanic etc become what they do.  Farming is a profession/trade no different than any of the others. 

A significant number of genuine farm buyers believe that they can add value - by increasing production/efficiency gains and do so.  We did that with our farm.  Bought a bit of a run down place improved the infrastructure/cow quality and pasture management and consequently improved production.  Even if the price per kilo to buy the farm today was the same as what we paid for it, because of the above it would be worth considerably more.

There is an ignorance of people at large in understanding why farmers become farmers in the first place, if they truly believe that the goal of farming is not to make a profit.  Banks will not fund a business on a continual loss making basis.  Even in the days of easy credit it was expected to be in profit at the end of the 3rd season if it was a business that required considerable capital expenditure.

Like SS I am not against a 15% capital gain tax - if it is applied to everyone and allows for inflation.  However, if people believe that it will deliver the benefits of lower land/house prices and make it easier for young people to get in to ownership, then they firmly have their heads in the sand.  Overseas buyers will not walk away because of a capital gains tax. 

The tax figure you refer to as the 'average' farmer has been discussed at length here.  All I can say is I pay tax in the high 5 figures as do most of our farming friends.  Those figures were taken in the lowest payout year for a while, and are distorted by the ability to write down livestock values (which are set by IRD) - no different to a business owner writing down stock on hand values.  Take a look at the figures year by year over the last 10 years and let me know how much tax farmers have paid.

Family homes MUST be included in any CGT.  I have family who shifted house on average every 3 years.  They would buy a bit of a dog, do it up and sell it off at a profit.  They have made very considerable tax free income on doing so - why should they get to keep those gains tax free, but a farmer who keeps a farm for 15/20years and then sells it have to pay cgt?

 

Thanks C.O. the average Dairy Farmer taxable income stands at about $126,000 and over the last decade average tax paid has been $28,225 that sounds a bit fairer so the average farmer pays about 22% tax which is better than I had thought after reading stuff.co.nz.

ref. http://www.nbr.co.nz/article/dairy-farmers-not-creaming-tax-system-nk-93417

I'm not against family homes having CGT although that would also mean the family farm house has the same tax - nice and easy across the board like GST (unless Labor make fruit and vege GST free).

I presume though that as a 'business' paying CGT, all home owners would want to claim maintenance and improvement costs as tax deductible, in the same way as a property investor does and for this reason it could cost more to police than any gain.

As I have said above, the family farming company is the only entity that currently does, right now, have a capital gains tax on it, and at a higher rate of CGT than Labour are proposing, and which captures even sales of livestock on the Herd Scheme (when sold to related parties).

For  many family companies, since the dreadful tax legislation from Bill English's budget of May 2010, abolishing access to QCs, they can sell a cow, or capital asset, to a total stranger for no 'tainted' tax, whereas there's a tax cost to sell to a family member - when the cow or asset is sold for exactly the same price to either party, and the same tax is paid on revenue profits.

The average farmer pays $1508 tax, the average unemployed person pays $1229 so I'm glad some more balanced people have commented while I've been away working.

Ref. http://www.stuff.co.nz/the-press/news/5017279/Dairy-farmers-paying-no-tax

I just don't understand how farmers can claim to be the backbone of our economy based on these numbers and will now give the unemployed a little more respect for at-least they pay their fare share based on what they bring in.

In NZ, dairy farm debt has risen from under $10b in 2000 to more than $40b in 2009 that's a whole lot of non taxable capital gain working through the system.

Ref: http://www.stuff.co.nz/business/5005469/Dairy-farmers-deep-in-debt 

If the market for milk goes tits up the government will bail them out (as per Canterbury Finance and AMI), and if the gamble pays out the loss is privatized through selling the farm.

It's certainly a win / win for farmers.

 

If the market for milk goes tits up the government will bail them out

The milk price will drop - that is as sure as night turns to day.  If it falls below $4.50kg It is not the farmers the govt will be bailing out - it will be the banks. 

haha....  sounds like we both hold banks in high regard for skimming the cream of the top 

The problem I think is not so much "skimming" as leaving "residue".  Lots of good articles on how banks and their profits need to be controlled otherwise they have more bad impact on an economy than a Govn....

and what is damning is during a recession their profits survive or actually increase.....

regards

tend to agree.  Hence I like the RB's idea (which they borrowed I believe) to seperate retail functions from lending, that way if a bank goes bankrupt due to bad debts it can continue trading so eftpos etc still works so consumers etc still buy food.

I also think that dairying is gambling on a very high price for its milk to farm silly debt levels, I cant see that continuing.......and i dont consider the banks totally to balme, farmers taking on to much debt and debt to avoid tax isnt good business IMHO....its a tax dodge, hence CGT seems worth looking at.

regards

There wouldn't be a problem with inflated land values if the market was allowed to find its own level. But the banks and (Government) do not allow this to happen.