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There has been much debate in New Zealand concerning the need for a separate and comprehensive capital gains tax (CGT) – a debate that was given fresh impetus in 2017 with the appointment of the Tax Working Group.

The Tax Working Group identified key socio-economic challenges facing New Zealand including housing affordability, wealth inequality and fiscal sustainability, all of which commentators argue have a link to the tax system. This article considers whether the New Zealand Government’s decision not to pursue, for political reasons, the Tax Working Group’s (majority) recommendation to extend the taxation of capital gains in New Zealand is a lost opportunity to address these three challenges.

Housing affordability

The available evidence indicates that a CGT would have only a limited (and possibly inflationary) impact on house prices and affordability. Countries with CGTs, such as Australia and Canada, also battle rising house prices (and bubbles) and the consequential negative impact on affordability. In addition, the introduction of the bright-line rule in 2015 (which taxes profits from secondary residential property sold within five years of acquisition), along with the existing comprehensive income tax provisions applying to land sales, effectively means there is already a de facto CGT applying to the sale of land.

Therefore, as far as the domestic housing market is concerned, while it ‘is likely that the tax system has created a bias in decision-making towards investment in housing’, the consensus is that non-tax factors, such as the substantial constraints on the supply of housing (including excessive land use regulation, inadequate infrastructure provision, and poor productivity in the building sector), immigration, and the presence of foreign buyers have been the primary drivers of house prices. For progress to be made on housing affordability, these non-tax factors need to be addressed.

At best, a CGT may impact on housing affordability at the margins by discouraging some residential investors or speculators. Rather, the greatest impact of a CGT may be on perceptions — the public’s belief that property investment is tax-favoured (and that this is driving up demand and house prices). For example, regular media reports of sizeable capital gains made on housing at least imply that the lack of a CGT drives rising house prices. In that context, the ‘value’ of a CGT would then lie more in the signal that it sends to the electorate (of a government willing to tackle all causes of rising house prices).

Wealth inequality

Wealth inequality in New Zealand, due in part to declining rates of homeownership, continues to grow, as do the consequential negative impacts on society. In their 2017 briefing to the incoming minister, Ministry of Business, Innovation and Employment officials stated: ‘The substantial increase in house prices over past decades appears to be the major cause of the observed increase in wealth inequality in developed countries’.

However, the limited link noted above between the tax system and house prices means a CGT would do little to address this cause of wealth inequality. Other tax changes already made to rental housing investment, including ring-fencing of losses and the abolition of depreciation on buildings, along with non-tax changes, have diminished the appeal of rental housing as an investment. This should reduce the inequality that exists between residential property investors and other investors/savers.

Fiscal sustainability

Treasury has projected that New Zealand’s ‘prevailing fiscal programmes are unsustainable over the longer term’, due in part to the ageing population and the consequential effects on the Government’s tax revenue and expenditure.

The Government will, therefore, need to increase tax revenue from existing sources and/or devise new sources of tax revenue by widening the current tax base. In percentage terms, the revenue generated by a CGT is small compared with other forms of taxation, but its introduction would have added another source of revenue for the New Zealand Government (and protect the income base).

However, the fact that revenue yields from a CGT are ‘volatile and unpredictable’ also needs to be acknowledged in the development of broader future tax policy in New Zealand.


New Zealand is in a unique position as a potential late adopter of a CGT to look at, and learn from, the practices of other jurisdictions. However, in designing any tax, it must have a clear policy rationale supported by evidence (including international experience).

The Government asked the Tax Working Group to ‘consider a package or packages of measures which reduces inequality so that New Zealand better reflects the OECD average while increasing both fairness across the tax system and housing affordability’. While a CGT would generate additional tax revenue, its introduction would have arguably done little to improve housing affordability and the related inequality issues. Also, some issues cannot simply be solved by taxation; housing affordability is one such issue.


Editorial note: This post is part of a special series to mark the anniversary of the release of the final report of New Zealand’s Tax Working Group and to assess its findings. The final report, Future of Tax, was released on 21 February 2019. The Group, chaired by former New Zealand Finance Minister Michael Cullen, was established by the Government of New Zealand in 2017 to consider the future of the New Zealand tax system. It was the latest major tax review after reviews in 2001 and 2010. Discussion papers and submissions to the Working Group are available at the website:


Further reading

Maples, A & Yong, S 2019, ‘The Tax Working Group and capital gains tax in New Zealand — a missed opportunity?’, Journal of Australian Taxation, vol. 21, no. 2, pp. 66-85.


New Zealand’s Tax Working Group series

How NZ Tax Working Group Recommendations Differs From Previous Reviews? The Influence of the Living Standards Framework and Māori Principles, by Alison Pavlovich.

Māori Perspectives in the New Zealand Tax Working Group Report: Tikanga or Tokenistic Gestures?, by Matthew Scobie and Tyron Love.

The Tax Working Group and the Circular Economy: Context and Challenges, by and .

This article has 1 comment

  1. Three bedrooms houses in Herne Bay selling for over $8 million would indicate that exisitng regfulation of the housing market is NOT working.

    The problem is that the housing market is NOT a market, and is bailed out by the publicj purse every time that the housing market sneezes. This has led to a dangerous imbalance.

    I know someone who wons 6 houses, has a $2.5 million mortgage and earns as a salary $70,000. An earhtquake, difficult tenant or interest rate raise will wipe him out and the banking system with him.

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