By Tony Wilkinson, Fiona Heiford & Maria Clezy*
It is a common statement that New Zealand does not have capital gains tax (CGT). But that is a misleading statement. It is more accurate to say that New Zealand does not have a comprehensive CGT, ie, a tax that applies to any type of capital gain on any type of asset or financial arrangement. However, many New Zealanders would be surprised to hear that in fact, not many forms of a capital gain are actually left out of the tax net under our current tax laws.
Regardless of whether one believes that CGT is a good idea or not, New Zealand's failure to be open about the fact that we have CGT in disguise misleads businesses and the public, leaves the topic open as an ongoing source of political debate, and leaves New Zealand with a piecemeal system of taxing capital gains that is not fit for purpose.
Time is long overdue to be honest about what we have.
Evolution in discussions
Over the last few decades there has been a lot of time and money spent on the numerous reviews and committees who have been tasked with evaluating the introduction of a comprehensive CGT in New Zealand. Most recently the coalition Labour-led Government set up a Tax Working Group to consider whether a comprehensive CGT regime should be introduced. Those reviews have resulted in countless reports outlining the many different reasons for having a comprehensive CGT and the many concerns about problems it could cause. The outcome of these reviews and committees has always been the same – no comprehensive CGT has been introduced. Despite this, the discussion continues at various levels by commentators, politicians and the public alike.
With the current economic outlook and next year's election looming large on the horizon, tax, including over the past few weeks the topic of a wealth tax (which is a form of tax on capital), is again on the discussion table. We've also heard Revenue Minister David Parker talk about fairness in the tax system, which has led to his announcement of a new 'Tax Principles Act', which he indicated would be drafted and passed into law before the election.
Changes in the law to tax capital gains
Still, there continue to be calls for a comprehensive CGT to be introduced in New Zealand and many commentators view it as a failing that New Zealand does not have one. But in reality, not very much is outside of the capital gains net. The broadening of New Zealand's capital gains taxes has occurred over time through expanding the concept of income to tax a much larger range of industries and types of investors or investments than were taxed even just 30 years ago. Tax on capital gains now applies to a wide range of activities and investment types including, but not limited to:
- Land dealers, developers and subdividers
- Financial arrangements
- Shares in overseas companies
- Cryptocurrency assets
- Land held for short periods of time.
The one type of property that, at least for now, seems to be off the table is the family home – but that home must be your main home and you must live in it for most of the time. If not, then part of the capital gain on that property may be taxed when it is sold.
Confusion and lost opportunities
Failure to acknowledge the fact that we do have a substantial CGT net in New Zealand leaves this open as an area of focus and confusion when it ought not to be. It would be more productive to instead direct time and effort to revisiting what we have and making it better.
What we have is:
- Inconsistency in the reason why we tax different types of assets. For example, New Zealand taxes:
- most assets based on the purpose for which they have been acquired
- financial instruments (eg, loans) according to the nature of instrument
- land based on identity of the owner and the length of time that the property has been owned
- shares based on the location of the company - Inconsistency in the timing of taxing capital gains. The existing rules tax different assets at different points in time – some will be taxed only at the end (ie, when it is sold). However, tax on some assets will be applied while a person still holds the asset and the amount of tax will be based on a 'paper gain' for which no income has been derived at the time when tax is due. This can cause financial stress for a person who must pay tax on an asset they still own but have not received any actual gain on as they then have to find money to pay the tax.
- A lack of design features that are usually included in a comprehensive CGT system, such as rollover relief, which ensures that a change in legal, but not economic or beneficial ownership, does not trigger a taxing event. Rather than a general relief provision applying to all assets, we have some rollover relief provisions in some rules (such as the bright-line rules), which provide relief in very limited circumstances.
Final thoughts
New Zealand has been stuck in a constant discussion about introducing a comprehensive CGT because we believe it is a cure all for a wide range of our economic, social and political ills, but we are doing so without recognising the reality that we already have an ad hoc CGT on most assets and investments. These ad hoc CGT rules have led to a unlevel playing field where people are taxed differently on different assets that they hold. The current regime is incredibly complicated, with little or no consistency and this causes drag in terms of compliance.
*Tony Wilkinson is Partner, Fiona Heiford Special Counsel and Maria Clezy Senior Associate at law firm Buddle Findlay. This article was first published here and is used with permission.
48 Comments
I disagree on Capital Gains on principal dwellings for average people, but it does make sense as the US does that above a certain dollar threshold then a Capital Gain goes kick in-currently that threshold is about 3x's Median Price in all but coastal mega cities. And any land held by land bankers should always be subject to a Capital Gains tax as are investment properties. In the US the profit over your original basis in a rental investment property less depreciation was added to your income, and the year of the sale your income was then kicked into a much higher tax bracket so that both State & Federal Governments enjoyed a windfall from the profit on your investment.
Should it be for all transactions, including buying/selling an owner occupied house? Is it inflation adjusted or indexed?
E.g. Someone buys a house for $100k 30 years ago (median house price), they sell now for $700k (median house price) and buys an $800k house.
Brightline test is 30% up to $70k and 33% above that. So $219k in taxes because someone wanted to move house. Do they explain to the bank they need to take out an extra $220k in lending to pay tax?
Ok, but think of it this way - you are saying that that person should not be taxed on income from a particular source, because if they are they won't be able to buy as nice a house as they like. For anyone planning on buying a house, and saving from their salary, they are also not able to buy as nice a house as they would like because income tax means they save less money. Why don't they then get to say, OK, if it's so important to preserve the ability to buy a nice house, I shouldn't have to pay tax on my income? Otherwise it seems like we are privileging people who already have a house (they get to avoid tax on income to help their buying ability) over those who don't already have a house.
I would like to see more analysis on that, and how other countries deal with it, how it influences behavior.
I suppose that selling and buying in the same market is just a checkpoint at which tax becomes due. Before selling there is some tax pending, after buying the new property the tax has been reconciled, maybe resulting in a debt to the IRD. At least the next gains on the new property are from a neutral basis.
And there is every chance we do not mean a whole 33% tax rate on that gain. Can't we start at 5% and then see how much distortion that creates.
"The only reason personal houses are excluded, is political, it's the "tax others, don't tax me" mentality"
Clearly not so . CGT on personal houses would imply a tax on moving house. If you are in favor of that for whatever reason that is one thing ; to just pretend the issue does not exist is disingenuous.
Its still the same house, any price inflation is reflecting the subsequent devaluation of money (the medium of exchange), for a multiplicity of reasons unrelated to the home or homeowners.
How are the CGT tax credits going to be paid when homes drop 20% eg this year
The reason you exclude the family home, is because it is not a Financial investment, it is required shelter.
Further, the Family living in said house should definitely not be taxed due to the complete and utter failure of the government and RBNZ to maintain housing at a reasonable level.
I am sick of everybody's Genius "Solution" being tax the average working class person more.
Calling BLT a CGT will freak out home owners ("are we next"). BLT is to punish specuvestors who make (made?) massive windfall gains of the misery of others (tenants and FHBs), not mums and dads living in their own home. Everyone needs to play their part in this charade.
Maybe a CGT across the board on everything ,why should it only be on property investors, it should be on everything if you buy a painting for 1M and sell it two years later for 2M then the profit should be taxed, you buy a business for 1M and sell it two years later for 2M then the profit should be taxed, across the board at say 7.5 % if the rate was low like 7.5 % most people would not begrudge paying it,,,,,
Crypto is taxed this way, and it's not just when cashing out to fiat currency. If I buy 10 ETH (Ethereum) @ $100, one year later each ETH is worth $200 and I swap it for BTC (bitcoin) without even touching NZD, I would be taxed on the capital gain ($1000 in this scenario). It's a joke as some of us have done these crypto-to-crypto swaps and can even be considered NZD poor but are expected to pay tens of thousands in taxes. Then we see stocks sold NZD no capital gains applied. Makes zero sense.
Shareholders argue shares are capital (not taxed) and dividends are the income (taxed). Crypto holders only make their money through the sale of the currency so that is their income on disposal. Gold bullion is the same, only bought with intention of making a gain on eventual sale (so for tax treated as revenue/trading stock and not capital). Tax the fruit and not the tree stuff.
I'd wager that a large proportion of people think that the CGT on a sold house is a percentage of the sale price, rather than a percentage of the capital gain.
On a separate note, if I buy a house for $1 million, spend $300,000 on it and later sell it for $2million, presumably the money spent on it is taken in to account. And what about improvements made from personnal labour - how does one cost these? e.g. I repaint the house with a few hundred dollars of paint but it takes me weeks, I do all the landscaping myself etc etc. Anybody know?
Why would you presume it would be taken into consideration?
A personal home isn't a business with deductable expenses and the improvements should be valued into the fair value measurement/market price at the point of sale/exit. I guess it would then come down to whether your improvements are worthwhile undertaking for the likely return you receive after CGT is deducted.
Any chartered accountants out there with a more detailed take?
Because if you tax the $1million capital gain, you're taxing the additional $300k spent (income that was already taxed). Would make more sense for the tax to be implemented on the other $700k gains, broadly speaking (as in, I'm sure there are plenty of other things to take in to account).
You can get a deduction for the expenditure ($300k) as a cost of revenue account property (the house) under s DB 23 of the Income Tax Act 2007 (see https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1513625…). Section DB 23(3) was recently amended to ensure the limitations on deducting capital or private expenses (e.g. renovations of a holiday home) were permitted if the house sale was taxed.
As to the return on your own personal labour. That is taxable to the provider e.g. if you paid a tradie to landscape they would pay tax on the payment and you could deduct the cost. However, if you paint no deduction for your effort but also no tax on that effort (that effort is taxed in the return in the value of the house).
We will need all the taxes we can find. Somewhere buried in the 2021 residence pathway decision documents was a decision to loosen health criteria for the 150k eligible migrants.
Let's see what happens when you further squeeze our public healthcare already at the brink of breaking down from an ongoing crisis so critical that 5 years of throwing bucket loads of money on it hasn't even stabilised the situation.
No problem with health criteria. Every applicant should have a medical and then their future health costs estimated - anything above average should be paid up front to the govt as part of the processing cost for a residential visa. For example I was 54 and only just under the BMI for obese so they could expect me to have a higher than normal probability of heart problems (and that is what did happen 15 years later) and I should paid more for my Visa; meanwhile a friend has a sister whose application was simply refused because she has a knee problem. She is a highly qualified senior nurse / nursing manager - just the type of immigrant NZ needs - why no let her in but insist she pays more - a sort of health insurance charge
GST is a consumption tax. If a farmer sells his farm to another farmer the sale will be taxed at 0% (called zero rated) as the farm is not consumed but rather sold as a going concern to produce stuff for consumption (e.g. milk, beef) which the new farmer will pay 15% GST on when they sell it.
Additional to what contributors have already stated, a BLT with a 10 year wait ( or better still a 5 year wait ) before you sell and get a 100% tax free gain, isn't the same as a CGT. Then there other taxes a government could apply to take the gloss of house selling, like Stamp Duty. That's without considering TOP's policies.
I am tired of the 'what can we do about house prices ' cry.
Inconsistency in the timing of taxing capital gains. The existing rules tax different assets at different points in time – some will be taxed only at the end (ie, when it is sold). However, tax on some assets will be applied while a person still holds the asset and the amount of tax will be based on a 'paper gain' for which no income has been derived at the time when tax is due.
This is the case if bonds (sovereign are included) are bought below par and held to maturity.
Annual capital accrual towards par is pro rata taxed at highest marginal tax rate applicable to the taxable entity.
Hang on. I thought we had a capital gains tax for everything if the intention at the time of purchase was to make capital gain? Can anyone confirm that?
If your intention at the time of purchase of any asset is to make a capital gain then it's taxable. So we have a total and comprohensive caiptal gains tax. We just don't use it.
If I'm right then Buddle Findlay have some serious explaining to do.
Another thing is they state that capital gains tax applies to share in overseas companies. This is definatly not right, the FDR tax is specifically what the acronym suggests.
Yeah, this column really avoided that elephant in the room.
Under NZ law buying land with the intent of selling it for profit means you owe tax. The problem has always been we skated around it and looked the other way...and everyone bought and sold properties for capital gains while pretending capital gains were merely incidental.
A broad and consistent land value tax would be the simplest and most efficient wealth tax. It would help to combat rising wealth inequality and it would increase the productive use of land by reducing land hoarding. It would be especially benefical if done as a tax switch i.e. increase tax on unimproved land while decreasing central govts PAYE or GST tax take or local govts capital value rate revenue. It could exempt the first say $100,000/hectare of land value so that it targets the uplift in value created by urban community growth or public infrastructure provision rather than rural land values.
Not even really a wealth tax either...more a fair share tax. The problem at present is that so much is borne by income tax and yet so much wealth is made that is not income (from work).
(And is totally accidental capital gains, whoopsie, nosiree totally didn't buy and sell that house to make capital gains...)
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