5 June 2013
I was talking to one of my customers earlier on today. He runs a highly successful company in Auckland that employs around 50 people. The company provides superior service in installing crucial parts of Auckland's infrastructure and works with many top 50 companies.
The company is still owned by the one Kiwi bloke and is currently contributing in excess of a million dollars a year to the government coffers, by way of PAYE, GST and terminal tax. It is a superb example of a Kiwi with entrepreneurial skills who saw a niche in the market, went for it, and is still dealing to international competition every day.
Over the 20 years of operation, I would estimate that the company has contributed something like $12,000,000 to treasury.
I asked the owner of this company to think about the effort and money he has invested in the company over the nearly two decades it has been operating. Time will run into tens of thousands of hours, while direct investment is probably in excess of a million bucks. In return, the company is probably worth 5-6 million if it were to be sold.
Compare that with the investor who bought a bare 29 hectares of land in Flat Bush around the same time the company started.
That land is now for sale, worth in excess of $80 million.
The owner will pay no tax at all. He has made over $5m a year for contributing nothing to the NZ economy.
In a country that can only rely on innovation to bolster our income from farming & tourism, how does this encourage entrepreneurship? Angel investors would be crazy investing in start-ups when they can buy and bank land for guaranteed returns far greater than any they will ever get from a new business venture.
What incentive is there for smart people to start up businesses and be smothered with red tape when such enormous tax-free gains await them for just buying land?
Just think, had my customer invested his million bucks in bare land, he would now be worth upwards of $80 million, ten times more than he has by creating jobs and growth. And he wouldn't have had to spend a minute on it.
"How do we change that?" he asked me, to which I gave him the obvious three-word answer:
Capital Gains Tax.
Given a capital gains tax, the seller of the Flat Bush land would be contributing $25 million to the economy. Instead, the entire $80 million will be sent overseas.
If someone can explain to me how and why this is good for New Zealand's future, please do so.
Copyright © Alan Charman