Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
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National, Act and New Zealand First say Labour’s tax proposal risks choking economic growth, while Labour argues the revenue would provide relief for struggling families.
THE FACTS
Labour will campaign on a capital gains tax in 2026.
Gains made on residential and commercial property after July 1, 2027 will be taxed at a flat rate of 28%.
It will exclude homes defined as the family home, farms, and inheritance.
“Who is this for?” is the question to ask for any big policy announcement.
Is it to please businesses, households, party faithful or party factions, or, gasp, simply because someone really truly believes in it?
Labour’s capital gains tax – one of the worst-kept policy secrets in politics– announced today does quite a good job being tailored in some way to all of these constituencies. It will displease all of them in some way, but probably not in a way that is so offensive that it creates a political problem.
He badly needed to do something to shore up his left flank, and so he U-turned on this position and promised to look at “progressive” tax reforms.
But Hipkins’ centrist instincts appear to have prevailed – and while agreeing to some form of progressive tax policy was clearly a sop to those to his left, Hipkins is still clearly mindful of the business and household audiences to his right.
In brief, today’s policy is a tax on capital gains accrued on residential and commercial property after July 1, 2027.
Exemptions include family homes (or almost all of them – more on that later), farms, and property gained by inheritance. The tax raises an average of $700 million a year over the forecast period.
This policy is progressive in name only.
In revenue terms, it raises just slightly more revenue than Labour’s new top income rate, introduced in 2020. Its flat rate of 28% is double the 15% proposed by former Labour leader Phil Goff more than a decade ago, but its remit – just residential and commercial property – is far smaller than Goff’s.
The rate is also far lower than what some investors would have paid under Hipkins himself two years ago.
The since-repealed tax regime Hipkins presided over as Prime Minister saw investors who sold within 10 years having their gains taxed at up to 39%.
Those who sell within two years still pay some tax at that rate. Today’s policy brings that rate down to 28% but extends the period in which it is liable out forever.
The Greens are angry at the lack of ambition, Tax Justice Aotearoa welcomed the change but described it as “unambitious” and a small step forward.
Details of the tax leaked to the Herald about six weeks ago – and Labour rushed the announcement out after another leak, this time to RNZ. This all points to some grumpiness inside Labour.
Businesses will be grumpy commercial property is taxed, but breathe a sigh of relief that the capital gains tax (CGT) ends there – it’s far better for them than a comprehensive CGT might have been.
Despite what National and Act are saying, this will not bring the economy down around us.
It will have a negative impact on some businesses – including some “productive” ones – but not a big one.
The sun will still rise, the milk will still be dried and farmers will still flood the country with profits creamed from the glorious if inauthentic New Zealand-made mozzarella that garnishes half the pizzas in China’s pizzas (true story).
The policy is a bit of a reverse Goldilocks, not too progressive, not too Tory. It disappoints everyone a little bit – Labour may find it, “just right”.
Labours dummy medicard. Photo / Thomas Coughlan
There are other clever spots. The policy funds three GP visits a year for all New Zealanders – a clever, if expensive, policy that gives people something to talk about rather than the tax itself. But the true genius was Labour’s decision to tie the policy to a “medicard” ostensibly to load your patient details etc (as in Australia), but mainly so that Labour has an excuse to print off physical cards and hand them out to all and sundry on the campaign trail.
It’s a fiendishly clever idea. Labour, more than most parties, knows New Zealanders love a card – pledge cards, Gold Cards (NZ First’s baby, but created in Government with Labour). It makes ephemeral promises real. These are doctor visits voters can touch.
They’re also doctor visits which, though they do not yet exist, the coalition threatens to take away.
Labour has created dummy cards with scannable QR codes – expect one in your letterbox between now and 2026.
Labour also didn’t bungle the announcement – in fact, its finance spokeswoman Barbara Edmonds may have had the best stand-up of her career. Despite not being given a speaking slot at the top of the press conference, Edmonds, an ex-tax lawyer, impressed with her practical knowledge.
Labour's finance spokeswoman Barbara Edmonds. Photo / Marty Melville
The Herald asked a curly question about retrospectivity, Edmonds replied with a precis of Australian tax policy in the 1980s.
CGTs live and die on detail. Edmonds suggested if there is a “show me the money” moment this election, it won’t come from her.
Someone owns a single home, they lose $100,000 on that home - how do they still get taxed?
That’s not to say the policy is not without its challenges – and not just the classic gripe of taxing the Kiwi bach (which this tax would do).
The “family home” is one of those mercurial, emotional concepts that every New Zealander can describe, yet is quite difficult to put into law.
The family home (dubbed “main home” by the Inland Revenue Department) definition Labour has taken for this policy is the one currently used under the two-year bright-line test. The main exclusion is that you need to have lived in the home for more than 50% of the bright-line period.
Where this causes challenges is that it is not uncommon for people who only own one home to have to leave that home and live somewhere else – this is particularly acute at the moment when homes in Auckland and Wellington have fallen so much in value that selling them would be ruinous for families.
The problem with this family home definition is that in cases where someone loses their job and moves in with family, while renting out their home, or move to another city and hold onto their home for a few years to recover some of the lost value, or they move into the family of a sick relative to be a carer, they could all become “investors” (depending on how long they had owned and lived in their home) under these rules.
Say you own a home in Wellington, where values have fallen the furthest, and get a job in Auckland where you rent, keeping your home in Wellington until it appreciates in value and you can afford to sell it.
Under the current rules, you would be required to pay a CGT on value earned after July 1, 2027, despite the fact that you still are likely to have lost potentiallyhundreds of thousands of dollars on the home.
The person only owns a single “family” home. They’re not really an investor, they’re just quite unlucky.
It creates a massive fairness issue for people caught in this bind. When they go to buy a new home, they’ll be bidding against owner-occupiers who pay no tax, meanwhile they’re having to find spare cash to pay the liability they accrue on selling their only home.
There is a way of making back this money – losses can be rolled forward to be offset against other liabilities.
However, it can only be offset against other CGT liabilities, meaning in order to get that money back, this hypothetical person would need to start investing in rental properties - the very thing the tax is designed to discourage.
The change affects a small but not inconsiderable number of home owners. About 130,000 first home buyers have entered the market since the start of 2021 – buyers who may be in a position which would require them to leave their home and rent somewhere else, becoming an “investor”. A larger number of owner-occupiers, who are not on their first homes and therefore have healthier balance sheets, could also be affected.
That particular rule is so rough, there is a very good chance Labour will clarify it before polling day. If it doesn’t change the rule, it will need to change its policy document, which on the first page of text says: “Nine out of 10 New Zealanders do not own more than one property, or a commercial property, so they won’t pay the tax.”
According to the information in the stand-up, that’s not correct – people who only own one home, and no more, can be taxed by this CGT.
Retirement villages and the economy
Two other thorny issues.
“Valuation day” created problems for the Tax Working Group CGT and is fraught with complexity (how are the properties valued, what happens if there is a dispute over a property’s value). All of that ambiguity is unhelpful for a tax policy, particularly one designed to hose down difficult questions.
That view, written by ex-Inaland Revenue Deparment staffer Robin Oliver, Joanne Hodge, and then head of BusinessNZ, Kirk Hope, recommended a narrow CGT, much like this one.
However, the report warned that “land and buildings can be inextricably integrated with business activities on which they are conducted” and that at that point “the costs of extending the tax base clearly exceed the benefits“.
New Zealand’s untaxed capital gains lurk everywhere in the economy – and not just in the residential property market. Some businesses own a lot of land like retirement villages and warehouses and the rising (largely untaxed) value of this land is an inextricable part of these firms’ bottom lines.
Grant Robertson massaging Chris Hipkins' shoulders at the announcement of Labour's fiscal plan in 2023. Photo / Dean Purcell
It’s not a particularly healthy state of affairs, in fact it’s rather unhealthy – but that’s not to say that weaning these businesses off their untaxed gains will be an altogether painless exercise.
It could see costs passed on to consumers.
The ones to watch are retirement village operators, who manage large property portfolios. The tax liable will depend on the retirement village’s business model.
Edmonds said that operators that actually sell units would be liable to the 28% tax. This too could be a challenge if the village operators haven’t factored the tax into their business model and decide to pass it on to buyers.
At a macroeconomic level, however, it’s hard to argue the tax would have any large impact on the economy – and may have a positive impact by directing investment towards more productive activity.
Fiscal questions unanswered
A lot of organisations back a CGT. The OECD thinks New Zealand should have one (most of its 38 member states do). As does the IMF.
In briefings to the incoming Government, Treasury suggested one might be a good idea – and it suggested one again in 2021 in its long-term fiscal review.
The reason Treasury recommends the tax, however, isn’t to fund new services, it’s because the Government can’t afford the services it already offers (in the same advice, Treasury discussed asset sales and hiking the Super age).
For political reasons, it’s almost impossible to release a new tax without saying what it pays for. Fiscally, however, that is what Treasury (and these other organisations – though they don’t say it) means when it says it backs broadening the tax base. It did not have in mind adding additional revenue only to see that revenue go back out the door in new services.
Those services are starting to look affordable. The cost of the old school lunch programme, which Labour has promised to restore, was about $350m a year – roughly half the average annual revenue of this tax.
Labour is promising to answer the “how will they pay for it” question in its fiscal plan, to be released after the Pre-Election Economic and Fiscal Update, weeks before polling day.
The party has talked a big game on raising pay and plugging workforce shortages – there’s no word in this policy detailing how these might be paid for. Instead it creates a new service needing new money.
The party is racking up quite the bill of commitments which do not yet have funding.
The annualised figures would be about $3.2 billion for pay equity, up to $500m in lost dividend income from SOEs, $130m for school lunches, and $600m to restore the operating allowances (the money that would pay for existing services), back to where Labour promised to have them last term, although Labour consistently spent above this amount.
That’s about $4.4b a year of money the party needs to find between now and polling day. Cancelling InvestmentBoost gets you about $1.6b a year. Bringing back the ban on interest deductions maybe hundreds of millions more, although at the cost of undermining the CGT and possibly scaring away investment needed to deliver on Labour and National’s bipartisan supply-side housing reforms.
Labour not ruling out other taxes
Related to this challenge is the fact that Labour hasn’t put the tax issue to bed entirely – and has left the door open to other revenue measures.
There had been speculation the tax policy would put a line in the sand for Labour, stipulating clearly what taxes it would agree to and what it wouldn’t. In questioning, however, Hipkins said: “This is our policy on capital gains tax”.
He left the door open for other taxes to come.
“When we set out our fiscal plan, which will be later on down the track, we’ll set out our position on other issues around taxation,” Hipkins said.
“We will set out any additional – or any other changes around tax – in our fiscal plan,” Hipkins said.
