Does New Zealand have a Capital Gains Tax?

Property investors worry the government will introduce a capital gains tax (CGT).

But, on the other side of the social spectrum, some Kiwis worry that the government won’t.

In this article, you'll learn what a capital gains tax is. You’ll also learn how it will affect property investors if it comes in.

Do you have a question or comment about capital gains tax? Feel free to leave your thoughts in the comment section at the end of the page.

What is a Capital Gains Tax?

A capital gains tax is a payment made to the government. It’s a tax you pay when you sell an asset for more than you bought it for.

Let’s say you bought a single share in Apple Inc (a technology company) at the end of 2010.

At that point you would have paid about $16.

Ten years later, that share would have been worth about $182.

In this case, your asset (the share in the company) has increased in value by $166.

That difference in value is a capital gain. It’s also sometimes known as capital growth.

If there was a capital gains tax, you'd have to pay the government a part of that gain once you sell the share.

If a capital gains tax was 15%, you’d pay $24.90 to the government in this example.

It’s important to note that a capital gains tax is separate from a wealth tax.

You pay a capital gains tax when you sell an asset (and make a profit).

But with a wealth tax, you have to pay the government a part of your wealth every year.

Will we see a capital gains tax introduced in New Zealand?

Capital gains taxes are unlikely to come in over the next few years.

And it’s not for lack of trying.

The Labour Party attempted a capital gains tax in 3 consecutive elections – 2011, 2014 and 2017.

The party got thumped at the polls in the first two elections.

In 2017, they won the election but didn’t have the votes to pass a capital gains tax into law.

Former prime minister Jacinda Ardern said she’d accepted that Kiwis didn’t want the tax and wouldn’t introduce one while she was in charge.

When she stepped down, this gave the opportunity for the new Prime Minister, Chris Hipkins, to bring one in.

But he, too, has said he will not bring in a capital gains tax over the next 3 years.

If National wins the next election, the chance that a CGT comes in over the next 6 years falls further.

But what about the Bright-Line Test?

NZ still taxes capital gains from residential property – even though we don’t have a formal CGT. It’s called the Bright-Line Test

John Key’s National government introduced this in 2015.

This policy taxed capital gains on property bought and sold within 2 years.

In 2018, the Labour government extended the test to 5 years.

They did this again in 2021. This time they extended the test to 10 years for existing properties, but it stayed at 5 years for New Builds.

What are the pros of a capital gains tax?

The arguments in favour of a capital gains tax vary, but often reduce to two core points:

Pro #1: A capital gains tax may increase housing affordability

New Zealanders usually think about CGT in the context of residential property investment. But, of course, the tax would cover all assets.

Some argue that a CGT will make housing more affordable over the long term.

That’s because property investors may be dis-incentivised to buy more properties.

That’s important to people who support the tax. The argument is that runaway house prices make it difficult for some Kiwis to buy their own homes.

This is true, and it also has a knock-on effect.

A rise in house prices may also mean an increase in rents. This causes a social issue where some Kiwis struggle to:

• Afford adequate housing
• Afford a reasonable standard of living while also paying the rent

The story goes if property investment is less profitable, demand will decrease.

This means house prices won’t be as buoyant.

Pro #2: A capital gains tax increases fairness within the tax system

The next argument is that wealthier people benefit more from tax-free capital gains.

People who earn higher incomes can afford to save and accumulate assets. These assets increase in value, making it easier for high-income people to grow their wealth.

But poorer people can’t afford to save as much so have fewer assets.

Right now the tax system primarily taxes income, especially derived from people working.

It doesn’t tax wealth or “economic income” from increases in the value of assets.

Some people see this as unfair and believe the tax system should address this.

What are the cons of a capital gains tax?

On the other side, there are also people who oppose a capital gains tax. They have two core rebuttals:

Con #1 – A capital gains tax will not slow house price growth

Many pro-property investment groups believe that a CGT will not improve housing affordability.

They believe that any such tax will not achieve its intended outcome.

Australia introduced a capital gains tax in 1985, yet house price increases have not lagged much behind New Zealand.

Between January 1985 and the end of 2021, Australian house prices increased 6.82% per year.

Over the same period, NZ’s house prices increased 7.54% per year.

So without a capital gains tax, NZ properties increased by 0.72 percentage points more, according to the OECD.

It’s not a substantial difference.

In other words, the tax may not provide value for money because it doesn’t achieve its goal.

Con #2 – The people who would have to pay a CGT already pay most of the tax

Those against a CGT say that higher-income earners already pay their fair share of tax.

These higher-income earners are more likely to own assets. So, is it fair to tax these Kiwis even more?

Yes, tax-free capital gains may seem unfair to those on lower incomes.

But about 50% of the lowest income earners in NZ already pay no income tax at all.

All income earners pay tax, but some also receive money back in benefits and tax credits (e.g. Working for Families).

“If you are working and earn $1000 a week but have four children, you might pay $200 a week in tax but get back $300,” according to Mark Keating, a senior lecturer in tax at the University of Auckland Business School.

“They are net receiving. It’s quite a strange system. It’s not common overseas because it’s quite bureaucratic.”

In that case, they get more money from the government each week than they contribute.

In effect, their tax rate is negative.

So most of the tax in NZ is already paid by the highest income earners. Some people say they already pay their fair share.

What impact would a capital gains tax have on residential property investors?

A broad-based capital gains tax doesn’t exist within NZ.

But, there is still a possibility a government could introduce one in the future.

A capital gains tax is unlikely to impact long-term property investors significantly.

That’s because many Kiwis use the equity within their own homes to grow a property portfolio. There are few other passive investments they can use this equity for.

So, taxing any gains won’t see that wealth pumped into alternative asset classes.

Any potential capital gains tax would cause investors to hold on to their houses for longer. This would lead to a less dynamic housing market.

A slow-to-respond property market could push prices up further. That’s because investors would be less likely to put their properties on the market.

This could lead to short-term supply shortages, which exacerbate rising prices further.

Want to learn more about property taxes?

If you're keen to learn more about property tax, then check out these articles: Top Property Accountants in NZ; Where Are The Cheapest Local Council Rates For Property Investors?; Beginner's Guide to the Bright-Line Test; and A Guide To Interest Deductibility.