Last week, when encouraging submissions on whether New Zealand should introduce a capital gains tax, former finance minister Sir Michael Cullen conceded that it would be among the most contentious issues the Government's tax working group deals with this year.

The working group has been charged with the responsibility of establishing a fairer and more balanced approach to taxation. But what that looks like is still uncertain at this stage.

In light of the strong opinions related to the issue, we asked Hobson Wealth's Mark Fowler and the New Zealand Property Investors Federation's Andrew King to put forward their arguments as to why New Zealand should or shouldn't introduce this tax.

Yea:Mark Fowler, head of fixed income at Hobson Wealth

Currently, New Zealand has different tax treatments for different types of investments – and by far the biggest disparity comes in the treatment of housing compared with other investment options. Against a background of growing political debate around wealth inequality in New Zealand, the issue of capital gains tax (CGT) is reliably one of the most polarising financial topics in this country.


It seems to me that the main argument in favour of CGT is that it represents a move towards consistency across the board in the way we tax investments in New Zealand. And isn't that the point of taxation for investments in the first place?

The Treasury and IRD recently published a tax working group paper – and what really caught my eye was a table detailing the marginal effective tax rate on savings.

It attempts to measure the tax rate on real, pre-tax income for investments that will earn the same rate of return - assuming that the real risk-free return is 3 per cent, inflation 2 per cent, and the marginal tax rate 33 per cent.

Arguably, a main contributor to the variation in tax rates is because of the non-taxation of capital gains for property versus other investments.

This disparity has created an effective tax haven for property investors - an unequal playing field that has undoubtedly contributed to an economy which heavily favours property over other investments. And of course it has - why wouldn't you take advantage of the disparity?

On a political level, it remains unpalatable to tax housing, unless it is purely speculative. Regardless of the perceptions concerning what CGT might do to the property market – acknowledging that it certainly doesn't appear to have slowed down increasing house prices in Sydney or Melbourne – shouldn't we look to have an aligned system of taxation?

What that might look like - whether the effective tax rates on other investments should be decreased, or that on property investment be increased – is another question. Ultimately, though, it's consistency that we should all be striving for.

Nay:Andrew King, executive officer of the New Zealand Property Investors Federation

Proponents of a capital gains tax usually want to increase tax on "property speculators" but the truth is that it taxes rental property providers, shareholders, KiwiSaver funds, farms, businesses and possibly all assets.


Many think a CGT will stop people investing in rental property and invest in more productive assets. This is short-sighted.

Firstly, providing a home for workers is investing in the productive economy, just as much a clothes shop selling clothes to the workers.

Secondly, a CGT will apply to shares and all other investments as well. If money is diverted from providing rental property it is more likely to go towards bigger and better homes that don't have a CGT. (Yet. Homes will be next)

A CGT hasn't stopped property price rises in countries that have the tax and it won't do so in NZ.

A CGT doesn't raise a lot of money and is costly to administer.
Overseas countries are reducing their CG taxes. The United States' CGT rate fell from 28 per cent to 20 per cent under Clinton then to 15 per cent under Bush. Investment increased and so did revenue from the tax. Investment in New Zealand is likely to decrease with a CGT.

A CGT decreases the return on capital and will lead to higher prices (including rental prices) as companies and individuals seek to compensate for it. Lower net investment returns makes investing riskier. Rental property is seen as a lower risk than shares or starting a company, so a CGT is unlikely to see increases in these investments.


In summary, a CGT will not reduce property prices, will not help first home buyers, will not increase company formations and will not raise tax revenues significantly.

But many say that because workers incomes are taxed, so should capital. It is seen as fair, but is it?

Is it fair that capital profits are taxed but losses do not reduce other tax payable?

Is it fair for workers that choose to save their tax paid income are then double taxed on the increased value of the investment? (Don't forget that they have paid tax on the dividends or rent they have earned throughout the years)

Is it fair that someone puts in many unpaid hours of work to improve their investment and then have the value they created taxed?

Inflation is often the biggest reason for capital growth, so is it fair to tax this?


The tax situation in New Zealand is relatively simple and fair. Changes because of perceived unfairness are likely to have unintended and adverse consequences.

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