New Zealand, unlike Australia, the United States and the United Kingdom, does not have a full-blown capital gains tax (CGT) regime.
Increasing pressure is being put on New Zealand’s Prime Minister and leader of the country’s centre-right government, John Key, to address the country’s overheated housing market, centred in Auckland.
Mr Key continually responds that implementation of CGT in New Zealand is too complex to administer, fending off criticism most recently by the Reserve Bank of New Zealand relating to the government’s inertia around what is now a housing crisis.
New Zealand actually does tax some capital gains
One such mechanism is the foreign investment fund (FIF) regime, by way of which certain types of foreign investment are taxed. These include direct interests in foreign companies of less than 10%, foreign superannuation schemes in some situations, and rights to benefit from foreign life insurance policies can be taxable on an unrealized basis – that is, the gain in the asset itself, rather than the income arising from the asset.
New Zealand also taxes gains made from the disposal of assets which were acquired with the intention of making a profit.
Australia, the United Kingdom and the United States have exemptions from CGT upon the sale of a principal residence, if taxpayers meet qualifying criteria.
We are not advocating for CGT, but we have several points to make from a tax perspective:
1. New Zealand is alone on not taxing gains under a full CGT regime.
2. An asymmetry in international taxation occurs, by way of CGT in other OECD countries. The result of which is that CGT is payable in one country, for example, the United States, without a corresponding credit for tax paid in the other country, New Zealand.
3. Changes to the New Zealand tax base could be made if CGT were introduced, such as a reduction in income tax rates and/or Goods and Services Tax, thus aligning tax rates with other countries more.
Practically speaking we disagree with the Prime Minister that CGT would be difficult to administer in New Zealand, based on our observations of how CGT operates in other OECD countries.
Additionally, the complex taxing mechanisms that New Zealand has in place under such rules as the FIF rules make the imposition of CGT in New Zealand relatively far simpler to administer. This is especially in the wake of changes to the FIF rules relating to foreign superannuation schemes. These are, in our opinion, more complex than ever to administer.