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.
If a capital gains tax is ever introduced, in my opinion, it needs simply to apply to all, or none at all. Loopholes can and will be exploited, and the end result could well be quite different than what was envisaged. By introducing capital gains on the business-related portion of the premises, I think we would be discouraging entrepreneurship in the startup sector where it most needs nurturing, driving more businesses to operate in the "grey economy" and providing more opportunities for those who "work the system" to take advantage of it, while the average Joe Bloggs ends up bearing the brunt.
No wonder an accountant I was talking to earlier this week said he would be thrilled if capital gains tax was introduced. He wasn't interested in the policy - but as he said, he would be guaranteed work year-on-year for a long time to come!
What do you think?