Capital Gains Tax will decimate the start-up industry

Cartoon credit: SonovaMin

It is tough enough starting a business in New Zealand, particularly a truly innovative one. There is little in the way of tax concessions and a lot of red tape is wrapped around what little there is. Capital gains tax is about to make that process even harder… or, at least, there will be even less incentive to go through the years of long hours and hardship that is required. quote.

Rocket Lab founder Peter Beck isn’t a fan of the Tax Working Group’s recommended capital gains tax system.

“Just saw the NZ capital gains tax recommendations,” Mr Beck said on his Twitter account.

“Taxing IP and stock will decimate the already fragile NZ start up industry. NZ already has big problems around creating large valuable technology companies and this will not help.” end quote.

Start-ups take time, are expensive and may require substantial borrowings or significant investors. Make no mistake, though, that the initial costs of the average start-up will not be taken into account when it comes to calculating CGT. There is enough uncertainty around starting up any business now, without the added risk of having to pay 33% (if the top tax rate stays at 33%) of the business value in tax in any future sale. This is a massive disincentive. quote.

One of Beck’s followers sarcastically said it was a “surprise” to see a “complaining millionaire” opposed a capital gains tax. Mr Beck rejected this characterisation of his view.

“A concerned citizen eager to support an economy of high value technology companies that employ lots of people and do great things,” he replied. end quote.

It is understandable why Beck might be seen as nothing more than a corporate bludger, but CGT really is the politics of envy. The supporters of CGT assume that everyone who does not support CGT takes this position out of pure self interest. That is simply not true at all. quote.

Economist Bernard Hickey replied to Mr Beck, saying his view shows why a land tax may have been a better way of achieving a more equitable tax system.

Newshub end quote.

While a land tax would exempt businesses and equities from the tax, this will just make land more expensive and land, in some parts of the country, is eye-wateringly expensive as it is. For those who claim that CGT will make houses more affordable for first time buyers (a claim that has never been borne out in any country where CGT has been introduced), how exactly is a land tax going to help to achieve that?

Not all entrepreneurs agree with Beck though. quote.

“The CGT could be very damaging to early stage investment if implemented poorly,” Angel Investment Association chairman Marcel van den Assum told the Herald.

“But on the other hand, it could be very beneficial if funds are shifted from unproductive assets such as property to productive assets such as innovative startups, effectively shifting from artificial to real-value creation,” he said.

“Opening up more funding, provided modest capital gains are offset by material capital loss consideration, is something I’m looking forward to.” end quote.

While I agree about capital losses, which are not deductible at present, I assume that they would only be offset at the time of sale as well and so would provide a limited benefit to most businesses. Why exactly this tax would provide a shift from non productive assets (property) to productive assets when both are being taxed in much the same way is hard to understand. I simply do not see why it would encourage anyone out of property investment, except to sell up and put the money under the mattress. quote.

Movac founder and rich lister Phil McCaw said, ” I want to reserve judgement to see what ultimately comes out in the wash. In terms of what’s proposed, I don’t see how going from one of the lowest CGT regimes in the world to the highest could be positive for investment in the early stage ecosystem nor how it helps one of the smallest nations in the world be globally competitive.”

A Newspaper end quote.

Business owners generally have to be careful not to be accused of self interest, but exactly how CGT could possibly benefit business start ups is something I don’t understand. As they say, maybe we just have to wait and see what the form the tax eventually takes. Whatever happens, it won’t be good.