Should home based businesses attract capital gains tax?

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Labour has signalled that if it were to introduce a capital gains tax, one issue that it would consider, would be capital gains on the portion of a dwelling used by a home-based business.

In today's Herald, Labour's associate finance spokesperson, David Parker, indicated the businesses it was really aiming to target were operations such as motels - but that any business operating from home could be affected.

As far as I can see, this would end up being a real hornet's nest. While this is not the forum in which I want to debate whether a capital gains tax per se is a good or bad thing, the more ifs and buts there are around who would or wouldn't be subject to it, the harder it is going to be to administrate and the higher the costs of doing so will be.

One thing I have definitely learnt over more than a decade of working with the home-based business sector is exactly how many different forms a home-based business can take. In some cases, the home base is a tiny proportion of the entire operation - perhaps as in the example of a motel or holiday park. In others, the owner simply uses the kitchen table while the rest of the household are at school or work. Yes, many business owners working from home are already making deductions for home use on their tax returns - but I fail to see that this would make capital gains of 15% on the business-related portion of the property fair.

Just take for instance two hypothetical operators. One runs a highly profitable plumbing business from the corner of a bedroom in a small property in a rural area, while a young mum in Remuera is starting a business which she runs from a dedicated room in her somewhat expensive home, working a few hours a day while the kids are in school. Neither of these businesses contribute to the homes gaining or losing value but in real terms it is the owner of the business which contributes less to the economy (at this point in time) who will be hardest hit when they sell the home. What a disincentive to try anything entrepreneurial!

Many home owners may well weigh up the pros of claiming the expenses or declaring the presence of a home business in any other way, versus the cons of being taxed when they sell the home. There is already a so-called "grey" economy operating below the GST radar - something which is not actually healthy or beneficial for the economy, the country, or even the business. Adding further "penalties" for operating a home business are simply going to drive more operators into this grey area. Not only that, but it may well be a disincentive for entrepreneurs wanting to start up a small operation from home as they are adding to the risk they are already taking the fact that, if they sell their home while they are operating from it, they will forfeit 15% pro rata of the sale price of the dwelling. Perhaps the smart ones will wind down the business first, flick it on or move to premises elsewhere before putting the home on the market.


5 Comments

Comments

Heather Douglas's picture

Good points

Thanks for your comments. You have raised some good points which have probably not been thought through properly by those proposing capital gains tax as outlined. It would be good to see more discussion on this subject. Bizbuzz is always happy to be a mouthpiece for home business owners so I'd encourage others to post their thoughts here too.

Helping you get buzzy with your business!

S Davis's picture

CGT for small home businesses

Hi Heather, this issue needs to be much more widely discussed. Here are the questions I sent on 19/3 to the Labour Party website - no response at all yet:

1. Ben Clark informs me that there will be no inflation adjustment for the 15% CGT on the home business floor space of a family home. They would then be unable to buy a similar home and continue their business in another house. How is this fair?
2. Home businesses are especially useful for women with small children. How does CGT on the family home help these people?
3. Would CGT apply to home businesses if people don't claim a portion of rates and maintenance as a tax deduction? Ie. even if people keep running their little businesses and claim expenses such as computer, printer, some electricity etc, but no floor space?
4. Will this apply to homeowners taking in flatmates or overseas students? If not, why not?
5. What number of kiwis do run businesses/work from home? (Including taking in flatmates if that counts towards CGT). I suspect that with the internet there are now far more home businesses and this should be encouraged.
6. Encouraging working from home policies are part of Auckland’s Draft City Plan. So how does Labour's CGT on homes policy encourage working from home?
7. How will spouse/partner rights be represented in Labour's system? Surely if the family home becomes partially liable for CGT, the spouse/partner needs to officially agree to this?”

I have been asking Ben Clark (North Shore candidate) these questions since before the elections and have only received replies to some of the issues. Another obvious question is this: when you sell your house, how will the Labour government judge what your house value was at the time the law came into effect? Ie on what 'increase' exactly to tax you?

If they will tax people on the increased value of their home even if no floor space (ie part of rates) is being claimed as a tax deduction, it is the most anti-entrepeneurial idea I have ever heard of. I would suggest that anyone concerned about this ask similar questions of Labour and also post them here.

Heather Douglas's picture

Clarification

Thanks for querying the details. The proposal is for home based businesses to pay 15% CGT on that portion of the home used for business. I am not necessarily against CGT, but the more exclusions and variances, the more opportunities are inadvertently created for loopholes to occur, and equally, the more unforeseen ramifications may be triggered. The potential effects of any change need to be fully thought through and appreciated, rather than just having a knee-jerk reaction which has unanticipated side-effects in due course.

Helping you get buzzy with your business!

deverve's picture

Capital Gains Tax

Just to confirm the details re: CGT on home businesses:
Wouldn't home-based businesses only pay 15% CGT on the overall profit of their business if they sold it?
Home-based businesses should be using accountants anyway to resolve the portion they use to work in (only if this is a separate dedicated space for their business). ie if 10% is used for business then 10% of home costs could be claimed...
I still see CGT as the most sensible tax that has been put forward yet and small business owners should understand the details fully before making any decision on this. Goto: http://www.ownourfuture.co.nz/?gclid=COfmqayjr6oCFUNLpgodf1Z98g

John Brimblecombe's picture

CGT on home business

1. Only if the home has a business area within it, separated entirely from the domestic area and fully self -contained and separately identifiable for costing of services eg power, water, telecoms/IT, etc i.e. a business premise contiguous/adjacent to the domestic operation but totally independent
2. CGT should be a disincentive to excessive property investment at the expense of export and supporting business for NZ. It should not be used as an indirect tax alternative merely introduced to increase the tax take

About the author

Heather Douglas's picture

I started HomebizBuzz in 2000, when I worked from home and realised there was nowhere for home businesses to find relevant information, nor a community of like-minded people to tap into for support, or just a chat.

Since then the site has grown to be a popular, active destination for self-employed business owners, a place to find information, resources, tools, support and friends.

I'm passionate about micro business, as they are often "invisible" and their contribution to the economy is under-rated. I've been involved in research projects, co-written a book chapter, launched The David Awards and lobbied government and others to help give the micro business person a voice. In 2005, I was humbled to receive a Vero Excellence in Business Support for the Individual who had made the biggest contribution to business support in New Zealand.

When I'm not driving Bizbuzz, I enjoy gardening, experimenting in the kitchen, entertaining, travel and spending time with my family.

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