Capital gains tax: A fairer future, or a Trojan Horse? - Generate Wealth Weekly

THE FACTS

• Labour proposes a capital gains tax on investment and commercial property, excluding family homes and farms.
• The tax aims to curb property speculation and redirect capital towards more productive economic areas.
• Critics warn it may discourage investment and impact housing supply and rental prices.

Few topics stir up as much political heat, public confusion, and angst, as capital gains tax. Labour’s latest proposal to introduce a targeted CGT on investment and commercial property has revived a long-dormant debate about fairness, productivity, and what kind of economy New Zealand wants to be.

While the idea of taxing profits made on the sale of property is hardly new, this version marks a cautious re-entry into the conversation. It is not a broad-based CGT, nor is it retrospective. The family home, farms, and a range of other assets (including shares) would remain excluded. Yet even this narrow iteration could reshape how New Zealanders think about property, savings, and investment for years to come.

Under the plan, any profit made from the sale of residential investment or commercial property after July 1, 2027 would be taxed at 28%, the same rate as the corporate tax and the top Portfolio Investment Entity (PIE) rate. The family home and farms are off-limits, as are inheritances and property transfers between partners.

Labour says the change would “level the playing field”, curb property market speculation, and help redirect capital towards more productive parts of the economy. Importantly, it would not apply to gains made before the start date (those remain untaxed) meaning only future sales on the gains made subsequent to July 1, 2027 would fall under the new regime.

Whether you’re for or against a CGT, the proposal has finally kicked off the conversation that economists have long argued New Zealand needs to have. Most developed economies, including Australia (since 1985), the UK (1965), Canada (1972), and the US (1913), have had a tax on capital gains in some form for a long time. New Zealand remains one of the few holdouts, relying heavily on income tax and GST.

There are some lessons from overseas that NZ can take if we go down this route. Across the OECD, CGTs work best when they are clear, stable, and predictable. Countries that make frequent changes (to rates, exemptions, or valuation rules) see compliance problems and reduced investor confidence. Administrative complexities also increase. Another recurring theme is behavioural response. When CGT is introduced, some people rush to sell before the start date, while others hold onto assets longer to delay paying tax. Although, over time, however, markets tend to adjust, and the effects moderate.

In the bigger picture, international evidence shows CGTs can raise meaningful revenue (typically 1–3% of total tax take), while improving fairness across the system. But they’re not a silver bullet for housing affordability. House prices in Australia, the UK and Canada have all risen sharply despite longstanding CGTs, suggesting that housing supply constraints, interest rates, and credit policy are much more powerful forces.

The OECD and NZ Treasury have both previously described the absence of a CGT as a structural weakness in our tax base. With an ageing population and a declining workers-to-retiree ratio (which is set to halve from about 4-1 today to 2-1 within two decades) the question of “who pays what” is becoming more pressing. As the working-age share of the population shrinks, the fiscal burden increasingly falls on a smaller group of taxpayers.

According to Labour, a capital gains tax could raise around $700 million a year providing the Government with some fiscal breathing room given net Crown debt now sits near 40% of GDP (roughly double what it was a decade ago). That Government debt could be repaid, freeing up tax take to go towards other public services. Labour has proposed using the funds for three free GP visits annually, but the extra revenue (as well as repaying debt) could also strengthen health, education and infrastructure, or support innovation and productivity through business incentives. Clearly linking the proceeds to visible outcomes such as healthcare or fiscal stability would help build public trust.

Supporters of the tax argue that New Zealand’s current system is out of balance. Income earners pay tax on every dollar they earn, while property investors are often sitting on significant untaxed gains. Arguably, property speculation also diverts capital away from more “productive” sectors such as innovation, manufacturing, and export industries. A CGT could help realign incentives.

There’s also the issue of inequality. The Inland Revenue’s high-wealth research project found that the wealthiest New Zealanders pay an effective tax rate less than half that of middle-income earners when untaxed capital gains are included. Bringing those gains into the system, even partially, would potentially make the tax framework fairer.

In the long term, the change could also reduce pressure on housing prices by cooling speculative demand. With around a third of all homes owned as investments, even a modest shift in behaviour could have wide-reaching effects.

The counter-arguments are familiar, and potent. Property investors may say they’re being unfairly targeted, noting that many rely on rental properties as a form of retirement savings. Critics warn the tax could discourage investment, reduce housing supply, and even drive up rents if landlords pass on the costs. There’s also concern that capturing commercial property could deter business investment or slow development. If an investor’s future profits are taxed, some may hold off on projects, delay sales, or channel money offshore.

Critics warn the tax could discourage investment, reduce housing supply, and even drive up rents.

There is also the narrative that a broader CGT could eventually reach other assets. The risk is that today’s “targeted” version becomes tomorrow’s Trojan horse. International experience supports this concern. In Australia, for example, the CGT introduced in 1985 initially applied narrowly to certain property and business assets, but over time it was extended to cover shares, managed funds, and even collectables. The UK followed a similar path, gradually broadening its capital gains regime to encompass most forms of investment income.

And, of course, there’s the political reality: no one likes paying new taxes, no matter how fair they may sound on paper. This is especially true in New Zealand, where the overall tax burden is already high by OECD standards. Many households and businesses feel they contribute more than enough, making the prospect of an additional tax (particularly one on capital gains) a hard political sell.

New Zealand already has a “de facto” capital gains tax in the form of the bright-line test, which taxes profits on investment property sold within a set time frame. Originally two years, it was extended to 10 under Labour, then reduced back to two by the current Government.

The difference is that the bright-line test applies only to short-term gains and uses an investor’s personal income tax rate (up to 39%) rather than a flat 28%. Labour’s proposal removes the time limit and simplifies the rate, effectively creating a permanent and more predictable version of what already exists.

While the mechanics of CGT seem straightforward, implementation will be complex. Setting an accurate value for every affected property as of July 2027 will be a logistical feat, and disputes are inevitable.

Then there’s the “lock-in effect”. Investors may hold on to properties longer to avoid triggering a taxable event, limiting housing supply at a time when more stock is urgently needed. Yet even opponents concede that the policy’s limited scope could mitigate some of these side effects. On the flip side, if even a small number of investors decide to sell before the proposed July 2027 start date, the short-term effect could be downward pressure on prices, followed by tighter rental supply if investors exit altogether. Globally, capital gains taxes are standard practice and the general experience has been that their introduction tempered speculative demand, but rarely caused large-scale sell-offs.

In any event, any negative impact to the property markets, could be positive for other asset classes. If any CGT introduced did discourage property investment, capital may flow into other markets – KiwiSaver, managed funds, equities or other asset classes which have higher prospective after-tax returns. That shift could prove healthy for the economy, helping to diversify the asset base of New Zealanders, many of whom remain heavily concentrated in property compared with investors in other developed economies.

Among the investment options likely to benefit are Portfolio Investment Entities (PIEs), which are taxed at a capped 28% rate (on income only) and have grown increasingly popular as savers look for diversification – particularly with term deposit rates falling. All Generate’s KiwiSaver and Managed Funds operate as PIEs, offering investors a consistent, capped tax rate regardless of their personal income bracket.

At its core, the CGT debate is about more than tax it is about values. Should income from labour be taxed while income from capital growth is not? Should the system encourage people to build businesses and invest in innovation rather than chase capital gains from housing?

The timing is delicate. While national property prices have been stagnant for some time, falling interest rates could soon reinvigorate the real estate market. Introducing a CGT at this juncture could risk undermining that recovery. If the market were to weaken further, tax revenues would shrink, leaving less for the health, education, and infrastructure spending the policy aims to fund. The country doesn’t need a fragile housing recovery to be stymied by new policy uncertainty.

For a Government seeking to appear fiscally responsible while promising better public services, CGT offers a political and economic balancing act. It could raise meaningful revenue and help close fiscal gaps without lifting income tax rates – but it’s a gamble with voters’ trust.

The current proposals, even if they never become law, have reignited an important national conversation about how New Zealand funds its future. The current model (heavily reliant on income and consumption taxes) may not be sustainable as demographics shift and public expectations grow.

For some, CGT is a pragmatic reform that would make the system fairer and the economy more productive. For others, it’s an unwelcome new burden that could distort incentives and complicate an already fragile housing market. The debate will surely heat up either way over the next 12 months.

Generate is a New Zealand-owned KiwiSaver and Managed Fund provider managing over $8 billion on behalf of more than 175,000 New Zealanders.

This article is intended for general information only and should not be considered financial advice. The views expressed are those of the author. All investments carry risk, and past performance is not indicative of future results.

To see Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, go to www.generatewealth.co.nz/advertising-disclosures/. The issuer is Generate Investment Management Limited.