6 March 2019 - The impact of the Tax Working Group recommendations on farmers
Issue date: 6 March 2019
Sir Michael Cullen, Chair of the Tax Working Group (TWG) has responded to a request to comment on recent claims about the effect on farmers of the Group’s recommendations regarding environmental taxes and extending the taxation of capital gains.
“The TWG’s Final Report provides a framework for using environmental taxes, and identifies scope for further development of tax instruments as a tool for addressing some of our most significant environmental challenges. It does not, however, recommend immediate adoption of specific environmental tax instruments. Nor does it make recommendations about specific levels for any environmental taxes, other than to note that the Emissions Trading Scheme (ETS) has under-priced the cost of greenhouse gas emissions.
“In several areas, we highlight issues that would need to be addressed before introducing environmental tax instruments – for example, addressing Maori rights and interests in water abstraction and water pollution. On the taxation of fertiliser specifically, we recommended that it only be introduced if significant progress is not made in the near term on implementing output-based tax instruments or other regulatory measures.
“The TWG also recommends some or all of environmental tax revenue should be used to help fund a transition to a more sustainable economy – for example, by helping farms transition to lower-impact operations. Analysis of the net impact of any environmental tax changes should take this revenue recycling into account.
“Concerning capital gains, the TWG has recommended extending the taxation of capital gains to cover a broader set of assets, including rural property, with tax generally being paid when an asset is sold or transferred. However, it’s important to note that this would only apply to capital gains made after the implementation date which the Government has indicated would be after the next election. Capital gains made before the implementation date would not be taxed.
“The TWG has also recommended that tax would not have to be paid when an asset is transferred or sold in some circumstances, and would instead be deferred until a later sale. These circumstances include death, relationship separation, and reinvestment for businesses with turnover of less than $5 million. For example, if a farmer dies and the property is passed down through inheritance, no tax would be payable at that time.
“The TWG did not recommend a 33 per cent rate for taxing income from capital gains. Instead it recommended that the gains be taxed at a person’s marginal tax rate, like other income. This means that the tax rate a person pays will depend on how much income they earn and their amount of capital gains.
“The TWG also recommended that if a retiring business owner, such as a farmer, sells their business, the first $500,000 of capital gains be taxed at their KiwiSaver tax rate. The top KiwiSaver tax rate is currently 28 per cent.
“Take, for example, a dairy farm purchased for $1.5 million 20 years ago, and worth $3 million at the time the new tax on capital gains comes into effect (excluding the family home). Suppose the farmer sells it 10 years later when they’re retiring, and the value of the farm has increased by around 3% each year so that the farm is sold for $4 million. Suppose also that the farmer made $70,000 of other income in the year of sale. The farmer will have made a $1 million capital gain from the time the new tax comes into effect, which would be taxable. $500,000 of this gain would be taxed at 28% (assuming this was the farmer’s KiwiSaver tax rate in each of the previous two years), while the rest of the capital gains would be taxed at 33% This would leave the farmer with a tax bill of $305,000 from selling their farm for $4 million.
“Of course, the family home will be exempt. Further, if the farm was passed on through inheritance, the tax would be deferred until it was sold.
“It’s great to see people engaging in the debate. These are important matters, so it’s important that people have the full picture” Sir Michael said.
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Last updated: 6 March 2019