The government’s decision to not progress with a Capital Gains Tax (CGT) is a smart move – and one many SME owners around the country will be relieved to hear.

Although the Tax Working Group’s (TWG) purpose is well intended, its recommendations have come under a lot of scrutiny for its blanket approach in its CGT proposal.

The introduction of a CGT was never going to be a silver bullet in evening the playing field to reduce inequality, in fact, the recommended approach sought to punish the next generation of risk takers willing to start or take on a small business.

Lack of understanding

The TWG’s lack of understanding surrounding risk and reward has been covered extensively over the last few weeks within numerous articles and opinion editorials.

In particular, the TWG’s preferred option for a ‘Valuation Day ‘approach – whereby all assets are valued on a particular day and taxed further when they are sold – raised many questions.

Not only was it idealistic and impractical to value all businesses on a single given day (there are just under 500,000 small businesses in New Zealand), the huge compliance costs associated with this approach would have been detrimental to the SME community and clearly demonstrates how out of touch they are with reality.

Valuing a business takes time and care. As a business brokerage firm, we, in support of the small business community, also made a submission to the initial TWG panel to discourage a CGT on business sales.

link business
Suneil Connor, CFO, at LINK business brokers.

More fuel for the engine

Small business owners often face long hours, squeezed profit margins and cash flow issues on a daily basis, and their dedication in running the engine of New Zealand’s economy deserves more incentive, not less.

With small business representing 97 percent of all businesses in the country and employing around 30 percent of the nation’s workforce, it would have been political suicide to penalise small business owners.

Despite the policy being supported by Labour and the Greens, small business owners found an unlikely ally in Winston Peters as his decision to veto a CGT was a great result for SMEs.

Political pivot

Despite the report from the TWG being comprehensive and prudent, it is unlikely any political party will be talking about implementing a CGT for decades to come.

Jacinda Ardern publicly declared that under her leadership (and despite her belief that a CGT is the best long-term solution to reduce inequality), a government led by her will never introduce a CGT. In my view, this certainly pushes Labour more to the centre of the political spectrum than it has ever been before.

This, in turn, encourages swing voters to favour the Labour Party, which is sure to have National feeling a bit uneasy as ‘tax talks’ have always been their strength.

It does beg the question, however, whether Labour will now use this opportunity to campaign for new taxes – especially since the marginal tax rate thresholds need to go up, and Labour may look to introduce a new top tax bracket. There’s more to follow in this saga, for sure.

Suneil Connor is chief financial officer at LINK business brokerage.

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