It is a common statement that New Zealand does not have capital gains tax (CGT). But that is a misleading statement. It is more accurate to say that New Zealand does not have a comprehensive CGT, ie, a tax that applies to any type of capital gain on any type of asset or financial arrangement. However, many New Zealanders would be surprised to hear that in fact, not many forms of a capital gain are actually left out of the tax net under our current tax laws.
Regardless of whether one believes that CGT is a good idea or not, New Zealand's failure to be open about the fact that we have CGT in disguise misleads businesses and the public, leaves the topic open as an ongoing source of political debate, and leaves New Zealand with a piecemeal system of taxing capital gains that is not fit for purpose.
Time is long overdue to be honest about what we have.
Evolution in discussions
Over the last few decades there has been a lot of time and money spent on the numerous reviews and committees who have been tasked with evaluating the introduction of a comprehensive CGT in New Zealand. Most recently the coalition Labour-led Government set up a Tax Working Group to consider whether a comprehensive CGT regime should be introduced. Those reviews have resulted in countless reports outlining the many different reasons for having a comprehensive CGT and the many concerns about problems it could cause. The outcome of these reviews and committees has always been the same – no comprehensive CGT has been introduced. Despite this, the discussion continues at various levels by commentators, politicians and the public alike.
With the current economic outlook and next year's election looming large on the horizon, tax, including over the past few weeks the topic of a wealth tax (which is a form of tax on capital), is again on the discussion table. We've also heard Revenue Minister David Parker talk about fairness in the tax system, which has led to his announcement of a new 'Tax Principles Act', which he indicated would be drafted and passed into law before the election.
Changes in the law to tax capital gains
Still, there continue to be calls for a comprehensive CGT to be introduced in New Zealand and many commentators view it as a failing that New Zealand does not have one. But in reality, not very much is outside of the capital gains net. The broadening of New Zealand's capital gains taxes has occurred over time through expanding the concept of income to tax a much larger range of industries and types of investors or investments than were taxed even just 30 years ago. Tax on capital gains now applies to a wide range of activities and investment types including, but not limited to:
- Land dealers, developers and subdividers
- Financial arrangements
- Shares in overseas companies
- Cryptocurrency assets
- Land held for short periods of time.
The one type of property that, at least for now, seems to be off the table is the family home – but that home must be your main home and you must live in it for most of the time. If not, then part of the capital gain on that property may be taxed when it is sold.
Confusion and lost opportunities
Failure to acknowledge the fact that we do have a substantial CGT net in New Zealand leaves this open as an area of focus and confusion when it ought not to be. It would be more productive to instead direct time and effort to revisiting what we have and making it better.
What we have is:
- Inconsistency in the reason why we tax different types of assets. For example, New Zealand taxes:
- most assets based on the purpose for which they have been acquired
- financial instruments (eg, loans) according to the nature of instrument
- land based on identity of the owner and the length of time that the property has been owned
- shares based on the location of the company
- Inconsistency in the timing of taxing capital gains. The existing rules tax different assets at different points in time – some will be taxed only at the end (ie, when it is sold). However, tax on some assets will be applied while a person still holds the asset and the amount of tax will be based on a 'paper gain' for which no income has been derived at the time when tax is due. This can cause financial stress for a person who must pay tax on an asset they still own but have not received any actual gain on as they then have to find money to pay the tax.
- A lack of design features that are usually included in a comprehensive CGT system, such as rollover relief, which ensures that a change in legal, but not economic or beneficial ownership, does not trigger a taxing event. Rather than a general relief provision applying to all assets, we have some rollover relief provisions in some rules (such as the bright-line rules), which provide relief in very limited circumstances.
New Zealand has been stuck in a constant discussion about introducing a comprehensive CGT because we believe it is a cure all for a wide range of our economic, social and political ills, but we are doing so without recognising the reality that we already have an ad hoc CGT on most assets and investments. These ad hoc CGT rules have led to a unlevel playing field where people are taxed differently on different assets that they hold. The current regime is incredibly complicated, with little or no consistency and this causes drag in terms of compliance.
If you would like to discuss how the tax rules apply to your assets or investments, please contact a member of our tax team.