News and Events

The goal posts might shift but it’s still footy

The highly anticipated final Tax Working Group report was released in February and by and large it contained what we expected it to. It recommended a Capital Gains Tax (the focus of this article) on assets other than the family home amongst a variety of other proposals.

By definition then, some farming assets could be captured by tax under the Group’s proposals. The tax would be paid at a farmer’s marginal tax rate and would kick in from 1st April 2021. That is, any gains on farming assets to date and through March 2021 would be off limits but after that, they would be fair game. And assuming a farmer earns more than $70,000, then those gains would be taxed at 33 percent (or at the company rate if the farm is structured that way) but only upon realisation, i.e. at the time of the farm business sale.

However, there are other important exemptions that would apply to the majority of farmers. For example, if a small or medium scale farmer sells his/her farm and then buys another similar, then the tax payment would be deferred in what is called “rollover relief”. To qualify for this relief, the Group suggests that annual turnover must be less than $5 million. Using dairy farms as an example, only farms with annual production of more than 800,000kg of milk solids would be captured. On the flipside, this then means the bulk of farmers will qualify for this tax relief. Also, like all tax payers the family home (even if on the farm) would also be exempt.

Next steps
It is important to note that the Group’s proposals are just that. The Government now has the task of deciding what proposals to adopt as policy and what ones to not. It may also choose to water down some of the Group’s proposals. The Government also needs agreement from its coalition partners, notably NZ First. Previously, NZ First has been a vociferous opponent of Capital Gains Tax. Accordingly, NZ First could play a spoiling role in any attempts to fully adopt the Group’s proposal. The final and (we judge) steepest hurdle for the Government is at the ballot box. Indeed, the 2020 election will be a stern test for the Government as it not only boils down to the merits of the policy itself but also the Government’s ability to sell it to voters, combined with its broader ability to win re-election.

What if a Capital Gains Tax does get through?
Bottom line, if the Capital Gains Tax is put through, farmers collectively will pay higher tax. But the question is – is a Capital Gains Tax the game changer for farming that some argue it is? In the short-term, we expect that land values are likely to adjust. Some farmers may choose to exit and take their earlier capital gains tax-free ahead of the April 2021 start date. If there is a large exit of farmers in a short period of time, then farm prices are likely to dip at that time. But we note farm values have already been adjusting lower to be more in line with cash returns anyway. Indeed, farmers have already been factoring in higher costs of compliance and moving to lower levels of leverage amongst other things. Meanwhile, the Overseas Investment Office changes have taken most offshore buyers out of the market for the time being.

Moreover, rollover relief will apply to a large number of small and medium scale farmers. As such, larger corporate style farmers will pay a disproportionate amount of the tax raised. That said, we do note that rollover relief will create an incentive to stay in the farming business longer than necessarily desirable (which the Tax Working Group describes as “lock-in”).

For our part, though, we think that farmers would adapt to this tax new environment as they have adapted to other changes in the past. And farming will continue to be about farmers’ abilities to generate returns from the land. Long-term, we are positive that will still be the case. In other words, the goal posts might shift but it’s still footy.