One of the most vexing and contentious issues in taxation is the proper treatment of capital gains — the increase in value of an asset such as shares of company stock, a business or housing. New Zealand currently had a complex and concessional approach to taxing capital gains. Indeed, at least 25 kinds of assets and transactions are presently defined as taxable – some on realisation, others on accrual or an equivalent, and still others based on imputed return.[1]


But unlike other countries with a United Kingdom income tax heritage, including Australia, Canada, and the UK itself, New Zealand has never enacted a general capital gains tax. The result is a ‘grab bag’ of income and deduction rules accumulated over more than 100 years. Some rules were developed by judges, often drawing on inappropriate trust law concepts. Others were hurried and unnecessarily complex responses by Parliament to economic events.[2] And some were the result of more principled tax policy analysis and consultation by government. Many of these do not represent appropriate tax policy for a small, open economy in 2011.[3]

The absence of a CGT affects New Zealand’s economic performance in two important ways. Firstly, as nominal tax income and dividends are taxed but property isn’t, New Zealand’s housing market has become the de-facto investment vehicle for many New Zealanders.[4]  Investment in property is an unproductive investment, and its favourability undermines New Zealand’s attempts at productive investment and growth. These distortions in investment have contributed to serious economic problems in New Zealand, including:

  • a record of poor productivity growth;
  • mediocre economic performance;
  • a low savings rate; and
  • high net foreign liabilities ratio. [5]

Why should someone earning $100,000 in wages have to pay $23,920 in tax, whilst someone who earns $100,000 on capital gains should have to pay next to nothing?”

While the lack of a CGT is not the sole reason for these issues, its absence continues to be a significant contributing factor.

Furthermore, the absence of a CGT retards two of the key objectives of government: encouraging human flourishing and establishing efficient markets, and is linked to the broader issue of tax reform and the need to increase savings.[6] Firstly, the loopholes created by a lack of CGT means that both the vertical and horizontal equity principles of a tax are compromised.[7]  The vertical equity principle, that people should be taxed according to their means and given according to their needs, is compromised as it is often the people towards the top of the ladder for whom investment in property is accessible and affordable. The horizontal equity principle, that people in similar circumstances should pay the same as others, is completely undermined by New Zealand’s lax capital tax laws. For example, why should someone earning $100,000 in wages have to pay $23,920 in tax, whilst someone who earns $100,000 on capital gains should have to pay next to nothing? [8]

Secondly, the inability of the government to encourage productive investment undermines the efficiency of the market, and hence New Zealand’s economic wellbeing. This report seeks to assess whether a CGT is an appropriate means for key government actions, such as addressing specific market problems and economic regulation.[9]

Taking into account these issues, this report seeks to address how best to implement a CGT in New Zealand. Therefore, the purpose of this report is twofold:

  1. 1.        To analyse the differing options for the implementation of a CGT available; and
  2. 2.       offer final recommendations, based on past scholarship and the example of Australia, as to how best to implement a CGT in New Zealand.

[1] Kevin Holmes, “The Concept of Income – A Multi-Disciplinary Analysis,” (Amsterdam: International Bureau of Fiscal Documentation), 383.

[2] See, for example, the 1973 land transaction amendments made in s. 88AA Land and Income Tax Act 1954 in response to escalating house prices at the time.

[3] New Zealand Treasury, “Medium-Term Policy Challenges and Opportunities,” (accessed 20 October, 2011).

[4] OECD, “OECD Economic Surveys: New Zealand, April 2011,”,3746,en_2649_34569_47611554_1_1_1_1,00.html (accessed 29 July, 2011).

[5] The Treasury, “Savings Working Group,” (accessed July 18, 2011); Victoria University of Wellington, “Tax Working Group” (accessed July 19, 2011) ; OECD, “OECD Economic Surveys: New Zealand, April 2011.”

[6] Michael Mintrom, Contemporary Policy Analysis (New York, N.Y.: Oxford University Press, 2011), 57.

[7] Morgan, “Capital Gains Tax Best Way to Tackle Rot.”

[8] Chye-Ching Huang and Craig Ellife, “Let’s Dispel the Myths and Close Tax Loophole,” New Zealand Herald, July 13, 2011.

[9] Mintrom, Contemporary Policy Analysis, 40.