By Irshad Ali*
New Zealand has long stood out among comparable economies not for what it taxes, but for what it doesn’t.
Perhaps nowhere is that more apparent than in its lack of a comprehensive capital gains tax: a measure used by counterparts including Australia, Canada, the United States and the United Kingdom.
In basic terms, this tax applies when an asset is sold for more than it was purchased for. The gain is treated as income and taxed accordingly.
While its absence has helped New Zealand to maintain a relatively simple tax system, it increasingly raises concerns about fairness, economic balance and the sustainability of government revenue.
For decades, that debate has largely been a political dead end, with successive governments concluding the electoral risks outweigh the policy benefits.
For at least one mainstream party, that now appears to be changing. After years of ruling one out under Jacinda Ardern, centre-left Labour recently proposed to introduce a targeted capital gains tax to fund free healthcare such as GP visits.
Parties to the right of Labour remain opposed to a capital gains tax – National argues it would add complexity and stifle economic growth – while those to its left generally support some form of broader taxation of wealth or capital.
In any case, the coming elections mean voters are likely to hear renewed debate about the tax. This is arguably overdue, given the mounting pressures on a tax system becoming increasingly harder to sustain.
The problem with taxing work more than wealth
New Zealand’s Treasury and Tax Working Group have repeatedly pointed out the country relies more on taxing wages than many comparable countries do.
This means workers shoulder a large share of the tax burden, while gains from rising asset values – particularly property – are often lightly taxed or not taxed at all.
This imbalance creates a structural issue. Two people can experience the same economic gain, one through wages and the other through asset appreciation, but face very different tax outcomes. Over time, this undermines the principle of fairness in the tax system.
Inland Revenue data and analysis have also highlighted how difficult it is to tax capital gains under the current system. Instead of a clear rule, taxation depends on intent, timing and technical classifications. This creates uncertainty and allows some gains to fall outside the tax net altogether.
The absence of a broad capital gains tax is not neutral; it advantages certain types of investment. Property, in particular, has benefited from favourable tax treatment.
New Zealand’s lack of a capital gains tax is a major point of difference compared to countries like Australia, which taxes gains more comprehensively. This has contributed to a perception, particularly among overseas investors that New Zealand offers relatively generous treatment of property investment.
There are benefits to this. Foreign investment can support economic activity, provide capital and stimulate development. Australian investors, for instance, have at times looked to New Zealand property markets due to fewer restrictions and favourable tax settings.
However, the gains from these investments are not evenly shared. Property appreciation largely benefits those who already own assets, contributing to wealth concentration. Meanwhile, younger or lower-income households who rely primarily on wages continue to pay tax at full rates.
In effect, the current system can amplify inequality by rewarding capital much more favourably than labour.
A capital gains tax would broaden the tax base by bringing asset-based income into the system. This does not necessarily increase overall taxation, but rather changes who pays and how.
Would a capital gains tax make a difference?
Labour’s proposal is relatively targeted. It focuses mainly on investment and commercial property, while exempting the family home, KiwiSaver, farms and inheritances.
As with any tax proposal, the question is not only who would pay, but how it would affect behaviour and economic activity.
A common concern is that capital gains taxes discourage investment or reduce house prices. Supporters argue the opposite: that taxing gains can reduce incentives to favour property over other productive investments and help broaden the tax base.
Research shows tax settings influence not whether but where capital is invested, while international experience indicates capital gains taxes tend to have gradual rather than dramatic effects on property markets.
At the same time, economists have identified potential downsides, including added compliance costs, valuation challenges and incentives for investors to defer asset sales.
Introducing a capital gains tax would therefore involve trade-offs. Inland Revenue would need systems to track gains, taxpayers would likely face additional record-keeping requirements and policymakers would need to decide how assets are valued and which exemptions apply.
Ultimately, the debate is not simply about raising revenue, but the future of New Zealand’s tax system.
As wealth becomes increasingly tied to asset ownership, questions about how different forms of income are taxed are unlikely to go away. Whether a capital gains tax is the right answer remains contested.
But continuing to rely so heavily on income taxes is becoming harder to justify.
Expanding the tax base to include capital gains is one option for rebalancing the system, improving fairness and supporting the long-term funding of public services.
*Irshad Ali, Senior Lecturer in Accounting, Auckland University of Technology.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
32 Comments
Labour's CG tax does bugger all. By exempting the family home, kiwisaver, and farms, they are exempting the main assets that appreciate. It will probably create more accounting burden than it generates in revenue.
The best way to tax wealth is to tax all wealth based on an expected rate of return (TOP policy). Then reduce income tax (unfortunately not TOP policy).
The horse has already bolted in terms of capturing CGT on property given the flat/declining property prices of recent times and the high likelihood that prices are not going to increase in the future
Implement it, backdate it 10 years, and enforce it heavily with no recourse for tax evasion, make a few examples in the public eye and investors would think twice about trying to skirt it. The public will roar, but it would certainly change investment behaviour sooner.
"certainly change investment behaviour sooner" - definitely, once international investors stop trusting the NZ government we won't see any investment.
Why do we need (international investment) it?...there is a reason (currently) but i wonder if you can identify it.
International investors like those purchasing assets in NZ for tax-free capital gain only or to use to avoid taxes elsewhere? So be it. We can't sell our souls to the world by continuing tax free capital gains anymore, and if this is all we are to the world then w=no loss if investors pile out. I doubt they were significant tax-contributors if so.
The backdating seems to be envy about previous decisions, rather than trying to change future decisions.
Just backdate the to the date of purchase (great gnashing of teeth and wailing). Imagine the fleeing away from specuhousing to invest in things like businesses, and the reduction in house prices to allow tax paying kiwis to actually live here. We would most likely see a great returning from Aussie.
The best way to tax wealth is to tax all wealth based on an expected rate of return (TOP policy)
Used to be TOP policy in the Morgan era, when it was founded, 10 years ago. They changed to plain urban land value tax (LVT) in the meantime
Then reduce income tax (unfortunately not TOP policy)
It absolutely was TOP policy since forever, and explicitly so last election. They had a calculator. They have shifted towards UBI-only since: https://www.opportunity.org.nz/tax-reset
Those asset examples reflect no increase in value, which is not the same as price.
The $ price +/- simply reflects money as the medium of exchange, re/devalued by govts monetary and fiscal policies outside the control of the asset owners.
As outlined above, a flawed thinking model contructed & endorsed by those seeking to sieze as much of other people's money as possible.
Any deemed rate of return is simply an artificial enabler for envy theft.
I suppose most of the western world govt are just thieves then? Perhaps many others have better social policy for housing, healthcare, etc than us but they have to balance the account somewhere, and tax deletes money spent by govt then it is needed. If not, you may find a less than satisfactory service if you need healthcare in the next 10-15years, and possibly wouldn't have a pension with the trajectory we are currently on.
"I suppose most of the western world govt are just thieves then? "
There's probably an arguable case, most have evolved into entitled duopolies & bureaucracies determined to protect their privileges.
Tax needs to be regular.
As such, a quarterly Land Tax is the best option because it has no scope for avoidance. Ergo Speculators are dead against it. Capital gains is easy to avoid by "not selling". Alternatively if capital gains is "estimated" and billed annually like they are proposing in Australia, it will create a mass culture of dispute and avoidance. Aka bad cashflow for the Govt coffers.
Opportunities Party (Land Tax policy) hit the 5% polling threshold recently, and even his 65 in the May Roy Morgan poll. Interest only debt speculators will be pooping themselves if this continues to rise going into October.
Let Specubludgers actually pay tax. Gets my vote.
TOP Propose a 1.75% annual tax on urban land and a 0.5% on rural land (land only not improvements)
This is somewhat offset by a universal 30k "benefit"
They have a 10 year phase in.
if you are asset rich and cash poor you could defer your 1.75% until death... imagine from age 60-95 then you die, that's a 61% death tax on land value.
Its a radical plan to depress land prices.
Or return land prices to what is really justified by our economy. This requires accepting land value has been warped beyond sense as a form of tax avoidance. Which it has.
Just a matter of perspective...
It would be interesting to debate what would happen to property prices during the 10 year transition period.
I suggest TOP may not want to have that debate before the election.
Simple. Down down down in ponzi town. Sure no property owner wants to face that, especially the interest only speculord waiting for inflation to screw everyone but themselves. There just needs to be a plan for the recent FHB'ers who are the literal meat in the sandwich in such a debate. Perhaps redirecting some/all of the $2b Accommodation Supplement ultimately given to landlords and banks would make a difference...?
I think its getting to the point where the land isn't worth that much any more (unless its a big section or in a great area).
They've been historically pretty vocal about having house prices falling. This cringe video circa their first election comes to mind: https://youtube.com/watch?v=YtxfwvxOaL4 as the most prominent example
Iirc Quilae (Q) is pretty vocal about it as well from the few interviews I've seen with her on the matter
TOP policy reads more like a radical NIMBY plan to restrict urban land supply and drive up urban land cost.
The reclassification from rural to urban land is a one way street. Under our current rules this incurs a massive council compliance cost and as a result we have lots of land where houses cannot be built next to our cities.
TOP will add their 1.25% tax penalty on top of the existing massive costs to further restrict urban land supply.
sort of yes and no
In Auckland if you are Rural you are simply not allowed to subdivide unless you can carve of 7H, 5H goes to bush and 2H to the new site.
If they converted us to future urban suddenly we can care off sections... so the good news is if they tax us a 1.75 they have to let us subdivide .
We are kind of shackled to history: we have a lot of people for whom the retirement savings have been in their own home and (maybe) a rental property rather than equities, bonds or cash.
It's made capital to develop the country hard to come by. In contrast, Australia's super funds crossed the 4 trillion dollar mark last year.
Our reliance on property has been fuelled by the unequal tax advantages property has enjoyed. Suddenly changing to taxing those effective retirement savings is going to cause a lot of problems for many older New Zealanders if there isn't a transparent, cohesive, carefully thought through and equitable transition, such as around the ability to structure self-managed superannuation funds (like Australia) and must include other inequities, including a re-evaluation of things like large commercial enterprises who operate as charitable trusts.
It would result in a massive reconsideration of modelling needed by the retirement home industry. If suddenly everyones properties went down in value then much less people would have the assets to be able to reserve a spot. Would a paradigm shift in this industry be a bad thing?
existing operations would exit.. but new models could develope.
if we are all worth less even TOP can only tax us from a lower level
My major concern as pointed out in the article is the cost for the IRD to set up and monitor this system, on top of all the exclusions. I'm sure that ringfenced losses would come off any capital gains tax so we end up with minimal tax income.
I'm not sure that this is correct, the days of manual adding up on a calculator are long behind us. The current government seems to be busy cutting workers to save money, telling us AI will take up the 'slack' and save lots. I'd say using the same old excuse to avoid tax on frankly ridiculous gains over the years, enhanced by successive government's lack of action (or snout-in-trough behaviour), is much like the old saw of the 'millionaires will leave if we do that', not sure it's true, but if lobbyists whisper it in the right ears, it'll never get through. But let's sell residency to prop up housing.
Setting up a dev test in the IRD system can't be too hard, can it? We're all in there, have unique numbers and addresses linked to our details. Give it a go and see if the claims about AI and the difficulty of implementing a fair system are true. I'd suggest (and I'm no tax or programming expert) that a few well thought through lines of code and input boxes could be tested, and on roll out, could act as a warning that "in XX years' time you will be liable for $XXXX. Might make a few squeal.
IRD recently updated their systems, and I would assume they have capacity for future changes to make this easier than with old legacy systems.
You'd hope so, given my (limited, but hard-earned) experience of these things, getting rid of the legacy is what makes everything tough and expensive. I think we have the wool pulled over our eyes by suppliers keener on keeping the golden goose, than providing a new better flock of 'em.
Broadening the tax base has to be a high priority. I'm not a supporter of increasing gst for the already acknowledged reason - that it imposes a relatively greater burden on lower income earners.
I was disappointed with the government tax cuts - not the right time with clear headwinds facing funding of core government services.
A general land tax coupled with adjustment to income based tax assessment rates would be a good start.
There are a several issues with this article, but it is worth picking on just one sentence.
"New Zealand’s Treasury and Tax Working Group have repeatedly pointed out the country relies more on taxing wages than many comparable countries do.":
This statement is simply false.
New Zealand has some of the lowest taxes on wage income in the OECD. This is because we fund retirement incomes out of general taxes, not social securities. Most countries impose large social security taxes on wages, not capital income and because we do not it means we have low taxes on wages and high taxes on capital incomes. This has been true for literally decades. OECD cross country comparisons suggest that an average worker in NZ has taxes on their wages which are amongst the very lowest in the OECD. Of course, in most countries you obtain a pension that is linked to the social security taxes you pay, so the tax system of most other countries are less distortionary than New Zealand's.
Secondly, the links to the two articles/ pamphlets in the sentence say nothing of the sort. The Tax Working Group document, which stems from the fundamentally flawed Tax Working Group report ( a report that starts by assuming the two most important articles written about tax in the last fifty years are wrong, and which devotes only a single page to the biggest difference between New Zealand's tax system and the tax systems of most OECD countries) does not say New Zealand relies more on tax wages than other countries. Nor does Struan Little in this speech.
As I never tire of saying, the single biggest difference between the NZ tax system and those of other OECD countries is that we neither have a social security tax on wages nor a mandatory saving scheme to fund retirement incomes. This means NZ has low taxes on labour incomes and high taxes on capital incomes relative to most other countries, not the other way around, as in most countries social security taxes are high and imposed only on labour incomes. Unfortunately Mr Little did not see fit to say this either. However, the Treasury has done almost no serious tax modelling in years, so this is not surprising. The Treasury should have a model capable of calculating the incidence of our tax system on different parties, but it has never bothered to develop one. It remains uncertain why senior people int he Treasury like Mr Little have allowed this situation to continue for so long. It also remains unclear why Mr Little is not so concerned about this situation that he doesn't develop one himself so that he can write speeches that explain why we have a tax system that is so different to those used in much richer countries.
Andrew Coleman
When I saw the headline, I thought this article would be about the special retirement savings (wealth) tax rates for Portfolio Investment Entities. To fix that problem and prevent people from paying zero tax on a profitable company's income, see my technical submission at: https://WiremuThomson.nz/static/doc/TechnicalSubmissionTaxPetitions.pdf
Alternatively, the submission can be found on Parliament's website in the submissions to the petitions committee. It's more about preventing people from paying lower than their tax rate, but any system that lets people pay a 0% tax rate on income isn't good: the gist of that problem is that Portfolio Investment Entities don't pay tax on gains even if they're buying and selling to make money, but sharetraders can account for capital losses; +1 - 1 = 0, untaxed +1 = 0.
For housing, they could start by removing the tax advantage for home owners (owner-occupiers) over being a tenant. The problem is tenants pay income tax on returns from their investments, whereas because home owners don't bother to charge themselves rent on their investment, they have no income to pay income tax on. So to fix it, tenants should be able to reduce their taxable investment income by returns that others make on their bedroom.
Rather than a CGT, I think an Excessive Essential Wealth Tax would be better which is just a wealth tax but only on essential wealth, e.g. houses, and only if it is excessive, e.g. more than 4 houses. This should help to prevent wealthy people from developing massive kiwi farms, whilst still providing a rental option for those who don't want to commit to buying a house. In terms of difficulty to do it, the easiest option may just be to add a central government component to residential rates and allow people to exempt up to 4 homes.
Whilst is sounds very fair and equitable to "tax the wealthy", in reality everyone will pay. If a future government applies capital gains, wealth tax or inheritance tax etc, you can almost guarantee it will also impact wage or salary workers as well. I by that I mean those who have worked hard all their lives and have built up some assets. So in other words, unless the government actually targets the top 1% (impossible since these people are far too smart to pay their share of tax), the government will end up taxing the regular working class again.
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