Labour’s Targeted Capital Gains Tax

The proposed CGT will apply to profits from the sale of commercial and residential investment properties, explicitly excluding the family home, farms, KiwiSaver, shares, business assets, inheritances, and personal items. In fact, they suggest nine out of ten New Zealanders would not pay tax on the property they own. The suggested exclusion is the family home. The implication being that the holiday home is still included.

The official release is light on any specific details, so any further information is purely speculation although it is suggested that the leaked version included some more details on the policy settings.

While not included in any official release, the leak suggested this tax would be at flat rate of 28%. New Zealand does currently tax some property sales. Those are properties which are part of a business of land developing, dealing or erecting buildings or associated to these businesses, certain subdivisions, land purchased with an intention of sale, some land subject to zoning changes and certain residential land sold within two years (brightline). All these sales are treated as ordinary income so taxed at marginal rates. A flat rate capital gains tax would mean a distinction still needs to be made between these types of land and other land if these rules remain. For people on high income the flat rate may produce a lower tax outcome. Where income is lower, being taxed under the ordinary rules may be better.

Labour leader Chris Hipkins framed the policy as a way to shift the tax burden away from work and business, arguing that the current system unfairly rewards property speculation over productive economic activity. The party insists that nine out of ten New Zealanders will not be affected by the tax. Labour claims the revenue will fund three free GP visits per year for every New Zealander via a new “Medicard” scheme.

This is not the first time in recent history a capital gains tax has been considered. New Zealand is in minority of countries without a capital gains tax. A lot of the others are the so-called tax havens. The Tax Working Group, in its 2019 final report, recommended a much broader CGT. The majority of members supported taxing capital gains on most assets, including rental properties, shares, business assets, and intangible property, with no inflation adjustment and gains taxed at the seller’s marginal income tax rate (up to 33%).

The other large piece of speculation is around the approach that will be taken to existing property. Labour has suggested this policy would kick in from 1 July 2027 and would not be retrospective. This suggests some form of valuation day approach looking to only tax future gains. This was one of the approaches considered in the Tax Working Group report. It does have its own issues and complexities, not to mention a strain on valuation services. There are of course other approaches that could be applied, and we will need to wait to see as more details are released.

Ultimately this will become an election issue as Labour is currently in opposition. Implementing any such tax would require a win in the next election which is due no later than 19 December 2026. Hopefully some more detail would be released before then as otherwise assuming a Labour win it would be a tight turnaround time to be implemented six months later, and we all know how well those rushed rules have gone in the past few years. Think brightline, denied interest, loss-ring fencing. A significant change to the tax system, in fact an entire new tax, deserves a better process if it is to be implemented properly.