Capital Gains Tax – Will We See One in New Zealand?

What a capital gains tax would mean. for property investors in NZ.
– Last updated: 26/02/21

Ed McKnight

Ed McKnight

Economist, property investor and host of the Property Academy Podcast
Introduction

Property investors around New Zealand worry that the government will introduce a capital gains tax (CGT).

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

This article explores both sides of the argument and whether investors are likely to be hit by the tax.

Definition

What is a Capital Gains Tax?

A capital gains tax is a payment made to the government when an investor sells an asset for more than they bought it for.

For instance, if you bought a single share in Apple Inc, a technology company, at the end of 2010, you would have paid about $NZ16. Ten years later, that share was worth about $182.

In this case, your asset (the share in the company) has increased in value by $166. That difference in value is called a capital gain, also known as capital growth.

A capital gains tax would then require you to pay the government a portion of that gain once you sell the share.

So if a capital gains tax was 15%, you’d pay $24.90 to the government in the above example if you sold the share ($166 x 15%).

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

Capital gains taxes don’t require a payment until the investor sells the asset. On the other hand, a wealth tax requires a payment to the government every year based on the value of a person’s assets.

Will We See One?

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

Capital gains taxes are unlikely to be introduced within the short term.

The Prime Minister, Jacinda Ardern, has stated that after trying to introduce a capital gains tax for 9 years, she has had to accept that New Zealanders are not supportive of the tax.

The Labour Party attempted to make a case for a capital gains tax in three consecutive elections – 2011, 2014 and 2017.

Although not the sole cause of electoral defeat, the party was thumped at the polls in the former two elections.

In 2017, they successfully won the election but did not have the votes to pass the tax into law.

At that point, Ms Ardern announced she would not pursue a capital gains tax while remaining the Labour Party leader.

When Might We See One?

When might a capital gains tax return to the table?

Even popular prime ministers eventually leave office.

Once Ms Ardern relinquishes the prime minister’s office, whether in her own time or through electoral defeat, a CGT is likely to be back on the table.

It’s impossible to gauge if or when that might happen. However, there is a precedent.

After 8 years as prime minister, John Key stepped back, making way for Bill English to take the reins.

Key had previously committed not to raise the age of entitlement for NZ superannuation (the pension) while he held the prime minister’s office.

Less than 4 months after taking the top job, Bill English announced a policy to gradually increase the retirement age to 67, changing from the National Party’s previously held stance.

So, Ardern’s commitment not to pursue a capital gains tax doesn’t mean it’s off the table forever. Nor does it mean her government won’t introduce other ways to tax wealth.

Here at Opes Partners our pick is that a capital gains tax will be back on the agenda at the 2027 and 2036 elections.

That’s because the 2027 election will be the fourth contested with Jacinda Ardern potentially at the top of the Labour Party. After 3 terms at the top, Ardern may not be Labour Party leader in this election. Her successor may decide to pursue a CGT.

2035 is also in our sights based on the assumption that parties generally hold government for around 9 years at a time.

If the National Party wins the 2027 election and holds government for 9 years, we’d expect the Labour Party to have a solid shot at winning the 2036 election.

What Do We Already Have?

NZ still taxes capital gains from residential property under the Bright Line Test

The government may attempt to tax property investors’ capital gains by tinkering with existing tax rules rather than introducing new taxes.

While we don’t have a broad-based capital gains tax in New Zealand, we still have systems to tax capital gains, such as the Bright Line Test.

This test was introduced in 2015 by John Key’s National government. This policy taxed capital gains on residential property bought and sold within 2 years.

The Labour government then extended the test to 5 years in 2018.

The government could extend the test from 5 to 10 years to tax property investors more. This way, investors can be targeted without breaking the promises Ardern had previously made.

Many NZ media organisations speculate the government may make this move shortly.

Arguments For The Tax

What are the arguments for a capital gains tax?

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

  • Housing affordability
  • The perceived fairness of not taxing capital gains



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

When New Zealanders talk about a CGT, it is usually in the context of residential property investment, even though the tax would cover all assets.

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

That’s important to proponents of the tax because runaway house prices make it difficult for some Kiwis to buy their own homes on the free market.

Rising house prices also increase rents, which causes a social issue where some Kiwis struggle to:

  • Afford adequate housing for their needs
  • Afford a reasonable standard of living while also meeting their housing requirements.

If property investment is made less profitable through tax, the story goes, demand for housing will decrease, and prices won’t be as buoyant.

Argument #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 than poorer people.

People who earn higher incomes can afford to save and accumulate assets. On the other hand, poorer people tend to have fewer assets.

As those assets increase in value, some high-income earners will see significant increases in their wealth without paying tax.

On the other side, someone who owns no assets and only earns income pays tax on everything they make.

Some see this as unfair because asset owners hold an increasing share of wealth, while people who solely work for a living don’t share this wealth.

Introducing a capital gains tax would, in the minds of its proponents, increase fairness between those who own assets and those who don’t.

Arguments Against The Tax

What are the arguments against a capital gains tax?

Similarly, those who oppose a capital gains tax have two core rebuttals to the above arguments:

  • The tax is an ineffective tool to increase housing affordability
  • Those who earn higher incomes already pay their fair share in the tax system



Argument #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 fail to achieve its intended outcome.

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

Between 1999 and 2019, Australian house prices increased 6.44% per year on average, according to the OECD.

Over the same period, New Zealand’s house prices increased 6.85% per year – just 0.41 percentage points more.

Those arguing against a capital gains tax will suggest that Australians pay significantly more tax on real estate through land taxes, stamp duty and a capital gains tax.

Yet, Australian taxpayers have not seen greater housing affordability in return.

In other words, the tax does not provide value for money because it doesn’t achieve its intended purpose.



Argument #2 – The people who would have to pay a CGT already pay an outsized proportion of tax

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

Just 3% of NZ taxpayers pay 24% of all income tax.

These higher-income earners are more likely to own assets, so those against a CGT question whether it makes sense to tax these Kiwis even more.

While tax-free capital gains may seem unfair to those on lower incomes, about 50% of the lowest income earners in New Zealand already pay no income tax at all.

That’s because although they make payments to the government’s coffers, they receive more money back in the form of benefits and transfers.

For example, one low-income earner may pay $200 a week in income tax.

But let’s suppose they then receive $300 a week back in Working for Families and accommodation supplements. In that case, they’ll get more money from the government each week than they contribute.

In effect, their tax rate is negative.


Those arguing against such taxes question whether it’s fair to continue asking a small number of New Zealanders to pay higher tax.

The Impact

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

Even if introduced, 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 necessarily see that wealth pumped into alternative asset classes.

Any potential capital gains tax or extension of the Bright Line Test would likely cause investors to hold on to their assets for longer, leading to a less dynamic housing market.

A slow-to-respond property market would potentially push prices up. That’s because investors are less likely to put their properties on the market, even if prices are rising.

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

What To Look Out For

What should property investors be looking out for?

A broad-based capital gains tax doesn’t exist within New Zealand. But, there is still a possibility a government could introduce one in the future.

Although, right now, the most considerable risk for residential property investors is that the government may alter the Bright Line Test to catch more properties.

Or, politicians could change the rules to tax the properties caught within the test at even higher amounts.

Anyone considering property investment is wise to invest before the government changes the tax system. Even if stricter tax rules come into law, it is likely they will only apply to new property transactions.

Related Articles

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.

Ed McKnight

Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.