The Labour Party’s politically-palatable capital gains tax attracts criticism from across the spectrum despite being intentionally moderate

Chris Hipkins’ Labour Party has chosen a narrow capital gains tax that applies only to investment properties, leaving all other assets untouched and the Budget unbalanced. 

In doing so, it has effectively followed the advice of tax lawyers Robin Oliver and Joanne Hodge and business leader Kirk Hope, rather than that of the late Michael Cullen and most of the 2019 Tax Working Group.

A majority of the group recommended including all kinds of property (except the family home) as well as business assets, intellectual property, and foreign and domestic shares. 

Oliver, Hodge, and Hope wrote a dissent to the group’s majority report and suggested only taxing the gains on residential rental and possibly second properties. 

Labour’s 2026 tax proposal goes slightly further by also taxing gains on commercial property (not farms). This would capture businesses selling work premises and long-term landlords or family trusts storing wealth or earning rental income.

But it is not a comprehensive capital gains tax. It is closer to being an extension of the Bright Line Test, from two years to infinity, as Treasury has previously recommended. 

This tax policy is deliberately moderate and should put to rest fears Labour hopes to form a hard-left government after the 2026 election. It is playing in the centre.

Narrow minefield 

Finance Minister Nicola Willis painted the policy as a sweeping tax that would hurt households and “put New Zealand’s economy at risk”. 

“This is a broad tax that will impact every business in New Zealand that has property, from the corner dairy to the manufacturing plant,” she said. 

“When you add more taxes, you add more costs every single New Zealander will pay, whether through their KiwiSaver account, fewer job opportunities, or ultimately, a higher cost of living”. 

But really the tax is too small to do much damage to the $435 billion economy.

Labour’s own estimates forecast it will raise an annual average of $700 million over the next parliamentary term as it builds from $100 million to $1.4 billion over four years.

Much of that money ($550 million) would be spent on a new policy—called Medicard—providing everyone with three funded visits to a general practice doctor and establish a digital system to manage healthcare entitlements.

The capital gains tax revenue won’t cover this cost until 2029 and thereafter it will add about $900 million above the cost of Medicard. However, this income would be lumpy and unreliable, disappearing during downturns and surging with upswings.

The Coalition has cut about $7 billion in spending from the government’s annual budget since 2023 and the money has been redirected into tax cuts, core public services, and the capital allowance. 

Labour’s capital gains tax does nothing to reverse these policy changes, nor seriously tackle future fiscal pressures from the ageing population and climate change.

And so, Hipkins would not rule in or out additional tax measures, saying they would be outlined in the party’s fiscal plan. These full spending plans are generally only released in the final weeks of the election campaign, leaving plenty of time for speculation. 

Property investors targeted

Interest deductibility is a particular concern for property investors. A capital gains tax is unwelcome, but removing the ability to offset mortgage interest against rental income would make most investments unviable. 

This was Labour’s policy from 2021 until they were booted from office in 2023 and the Coalition began to phase interest deductibility back in. 

Matt Ball, a spokesperson for the NZ Property Investors Federation, said the policy was a "Frankenstein monster” that would please nobody.

Labour had failed to win public support for a comprehensive capital gains tax and was now targeting property investors for special treatment.  

“Other businesses are fine, apparently, but if you want to provide a warm dry home for other people to live in, you must be punished. It doesn’t make sense,” he said.

Still, the policy could have been worse. Ball said the Federation’s members would prefer a capital gains tax over the removal of interest deductibility, which would completely “kill property investment". 

He was pleased the party would allow for improvements and renovations to be deducted from the capital gain but wanted the sales price to also be adjusted for inflation. This would prevent overstating actual profits from the gain. 

Australia indexed its capital gains tax to inflation until 1999 when it switched to only taxing 50% of the gains on assets held by individuals for more than a year, which reduced the need for inflation adjustment.

The Left left behind 

It wasn’t just the National Party and property investors criticising the policy, the Green Party also stuck the boot in — saying the “watered down” policy didn’t go far enough. 

“Right now, the wealthiest pay half the effective tax rate of our nurses, teachers and firefighters. Labour’s announcement doesn’t even try to fix that.”

“In a year, the richest family in this country can make more money in their sleep, without lifting a finger, than Labour’s proposed CGT would generate,” Chloe Swarbrick said in a press release.

Her party has proposed a 2.5% wealth tax on net assets held by an individual above a threshold of $2 million. This would raise a lot more revenue (potentially $17 billion a year) but it faces stiff opposition from other political parties. 

The Council of Trade Unions stuck with Labour and endorsed their CGT policy, despite its limited scope. 

Ainslie van Onselen, the chief executive of Chartered Accountants in Australasia, said the “CGT-light” policy needed to be a plank in a wider tax reform agenda. 

“It has some attractive features, namely that it’s easy to understand and comply with. However, while the policy is framed as addressing shorter term health system challenges, it’s unlikely to generate significant short-term revenue,” she said. 

“The proposed CGT’s inability to generate substantial income is compounded by the fact that NZ residential property prices have fallen following the Covid-era property bubble. It’s not clear that there would necessarily be significant gains on property ownership in the near future”.

The irony is that the housing fever this policy aimed to cure may already have broken. 

A new generation of buyers—who helped fund their parents’ tax-free gains—could now face tax on their own modest ones.

Plus, taxes on rental property owners could push rents higher, especially now that land supply is less of a constraint. That risk wasn’t a concern when rents were already rising as fast as tenants could afford, but that’s no longer the case.

It’s better late than never, but barely.