New Zealand Taxation: Arguments for and against Capital Gains Tax

This report delves into the contentious issue of capital gains tax in New Zealand, a nation unique among OECD countries for its lack of a formalised capital gains tax. It explores the arguments both for and against its introduction, considering the economic and political factors at play. The report examines the rationale behind capital gains tax, including the desire to broaden the definition of income and address inequities in the current tax system. It analyses the perspectives of both Labour and National governments, highlighting their stances on taxation and investment. The report also discusses the 'bright line test' and its implications. Ultimately, the study concludes that while arguments exist against its implementation, the case for a comprehensive capital gains tax, based on principles of fairness and equity, is strong and justified within the context of New Zealand's tax policy.

Running head: NEW ZEALAND TAXATION
New Zealand Taxation
Name of the Student
Name of the University
Authors Note
Course ID

1NEW ZEALAND TAXATION
Table of Contents
Introduction:...............................................................................................................................2
Arguments for Capital Gains Tax:.............................................................................................2
Arguments Against Capital Gains Tax:.....................................................................................4
Perspective of Labour and National Governments:...................................................................5
Perspective of Bright line test:...................................................................................................6
Conclusion:................................................................................................................................7
Reference List:...........................................................................................................................8

2NEW ZEALAND TAXATION
Introduction:
New Zealand is considered to be an exciting nation to study the capital gains tax since
it is one of the rare OECD nations currently that does not possess the formalised capital gains
tax. In spite of the political and international weight to introduce capital gains tax over the
last decade, the attempt has turned out to be unsuccessful1. The difficulty involved in taxation
and robust public confrontation concerning the introduction of new and additional system of
taxation were regarded as the primary reason for not introducing an inclusive capital gains
tax.
Over the years, recommendations during 2009 from the Tax Working Group and 2013
OECD committee had revived the debate to introduce the capital gains tax from the labour
and green parties. The study takes into the considerations the rationale for introducing the
capital gains tax that are consistent with the consistent with the capital gains tax regimes.
Arguments for Capital Gains Tax:
Currently the interest derived from the term deposit is charged however the capital
gains on the sale of investment is not taxed. An important drivers of reformation was
increasing the scope of income in order to include the broader economic definition of
accretion in value. This represents the end of so called capital revenue difference since all the
capital gains tax would be taxed2. As the part of the financial arrangements regime was
introduced during the year 1986, followed by the introduction of the foreign investment fund
regime during1989. The purpose of both the regimes was to impose tax on the overall
economic return from investments instead of income under the traditional wisdom of the
interest and dividends.
1 James, Colin. New territory: the transformation of New Zealand, 1984–92. Bridget Williams Books, 2015
2 Kelsey, Jane. The New Zealand experiment: A world model for structural adjustment?. Bridget Williams
Books, 2015.

3NEW ZEALAND TAXATION
The rational supposition of the reformation of tax was the introduction of the capital
gains tax. For a large number of transactions, a realisation based capital gains tax would be
theoretically vibrant than the present system of law3. This is particularly considered to be true
land of transactions where there are questions relating whether or not the sale of subdivision
is considered taxable is dependent upon the factors as outlining an individual’s intentions or
what constitutes the minor of nature. The introduction of bright line test during the year 2015
illustrated the instability of the current approach of imposing tax on the land transactions
depending upon the intention at the time of purchase.
Arguably the realisation based capital gains is considered to be far more
comprehensible to the amateur. Critically the capital gains tax would be more enforceable
since the intent would not anymore be determined4. The capital gains tax would be fairer
given the subjectivity of measuring the intent of the taxpayers is considered to be identical on
certain circumstances which could presently finish up with different tax bills.
The lack of capital gains tax has resulted in uncertain foundation of rulebooks for
deciding and altering the taxable values of assets in New Zealand tax legislation. This can
result in chances for taxpayers to grip the assets purposely on the income account and
undertake various deductions. For instance, the secondary company occurs a deductions
relating to share subscription and a deduction for spending that5. This of course is not
unavoidable consequences for not implementing tax on the capital gains. It is, however
3 Hail, Luzi, Stephanie Sikes, and Clare Wang. "Cross-country evidence on the relation between capital gains
taxes, risk, and expected returns." Journal of Public Economics 151 (2017): 56-73.
4 Feld, Lars, et al. "Taxing away M&A: The effect of corporate capital gains taxes on acquisition activity."
(2016).
5 Thomson, David. Selfish Generations?: The Ageing of New Zealand’s Welfare State. Bridget Williams Books,
2015.

4NEW ZEALAND TAXATION
considered as the consequences of tax systems, which does not places emphasis on the
changes in the wealth or balance sheet of the taxpayer.
Depreciation creates an additional structural problem. A system that provides
depreciation identification, which the depreciating assets suffers from the yearly, unrealised
fall in wealth or loss in terms of income. Since the New Zealand, system of taxation is based
on the non-identification of changes in the values of asset, the actual income tax system does
not provide for depreciation.
Studies suggest that equity offers a strong argument for comprehensive capital gains
tax. Importantly, not imposing capital gains tax might lead some of the people paying less
amount of tax in comparison to people having the same ability of paying. Accordingly, the
non-existence of complete capital gains tax can result in injustice of the present system of tax.
Arguments Against Capital Gains Tax:
A capital gains tax may be economically considered to be desirable but the
government is not likely to present one given it does not have certain measurable common
backing. It is vital to understand the public attitudes towards the capital gains.
Arguably, Capital gains tax would possibly produce a significant quantity of
management expenditures for the government. The New Zealand Inland Revenue would
sustain a cost for assembly of taxes, measuring and auditing, debt retrieval, forecasting of tax
revenues, advising, writing public and private rulings6. Furthermore, it is difficult to compare
the administrative cost globally. For instance, the UK Inland Revenue administration cost of
capital gains tax stands only 1.9% of the capital gains tax revenue. This suggest that New
Zealand capital gains tax administration costs would be identical and hence marginal in
6 Fabling, Richard, et al. "Estimating firm-level effective marginal tax rates and the user cost of capital in New
Zealand." (2014).

5NEW ZEALAND TAXATION
comparison to the income generated. Nonetheless, the capital gains tax results in difficult
administration in other nations that have them.
Another argument against the capital gains tax is that New Zealand taxpayers would
have to incur an additional costs of compliance. They would be required to determine the
liability of tax, payment of tax, maintenance of records and obtaining tax advice. The greatest
amount of simplification is from the exclusion of earnings and assets dichotomy7. This would
efficiently help in ending the clash among the tax organisers and government over the
indefinable perception of earnings.
Perspective of Labour and National Governments:
The perspective of labour and national governments includes imposition of tax on
assets in order to shift the investments away from the housing in order to raise the revenue
and increase the fairness8. According to the perspective of Labour and National Government
taxes will be comprehensive as the matter of opinion and would offer both the blanket
exemption for the family home. Furthermore, the labour’s proposal of capital gains tax on
realisation, taxpayers acquire a deferral advantage that is not available under the accruals
based on the capital gains tax.
Taxpayers generating profit with the help of capital gains are exempted from tax
while taxpayers that are generating identical profits however from the income flowing
sources are levied tax9. This can be regarded as greater injustice of the present system of tax.
7 Harding, Michelle, and Melanie Marten. "Statutory tax rates on dividends, interest and capital gains." (2018).
8 Alley, Clinton, and Joanne Emery. "Taxation of Cross-Border E-Commerce: Addressing the Tax Challenges of
the Digital Economy in New Zealand." Journal of International Taxation28.7 (2017): 46-55.
9 Mares, Isabela, and Didac Queralt. "The non-democratic origins of income taxation." Comparative Political
Studies48.14 (2015): 1974-2009.

6NEW ZEALAND TAXATION
The important source of social justice is that individuals under comparable situations must be
considered equally.
Perspective of Bright line test:
As the part of 2015 budget, the government declared its purpose of introducing the
rule of new land sale in order to complement the purpose test in the rules of property test.
Under those rulebooks, gains made from the land sale are considered chargeable when the
land is purchased with the purpose of resale and the taxpayers is obligatorily required to file
return of any income as gain10. The particular intention of test may be problematic to apply.
To transact with this problems, the fresh legislature gave way for the stress-free enforcement
of bright line test.
The bright line test is regarded as the second of the three phases of the government’s
transformation set to make tighter rules of property investment that was publicised as the
portion of budget in 201511. The bright line test is applicable to residential land including land
of dwelling where the owner has arranged to construct house on it. The bright line test is not
applicable to an individual’s property that is not acquired though the inheritance. An
individual can only have one main residence.
The main house omission is usually obtainable to assets that are held in trust. There is
a rollover assistance for the property that are transmitted as the result of association contract
of property. The bright line test perspective is that any potential amount of tax liability would
be deferred until the subsequent sale12. Taxpayers would be allowed deductions as per the
10 Littlewood, Michael. "Capital gains taxes— a comparative survey." Chapters (2017): 1-29.
11 Stantcheva, Stefanie. "Optimal taxation and human capital policies over the life cycle." Journal of Political
Economy 125.6 (2017): 1931-1990.
12 Gibbons, Matthew. "Government expenditure in New Zealand since 1935: a preliminary
reassessment." Policy Quarterly13.2 (2018).

7NEW ZEALAND TAXATION
ordinary tax rules for property, which is subjected to bright line test. Any form of Losses
originating from the bright line test would be restricted in a manner that is only used to offset
the chargeable gains from the sale of other lands.
Conclusion:
On a conclusive note the study has investigated and explored whether or not the
capital gains a complete capital gains tax must be familiarised in New Zealand. Although
several arguments have stated that the institution of capital gains tax would result in
complexity others have observed that the comprehensive capital gains tax reduces the degree
of compliance and costs of administration.
The central reason for adopting capital gains tax in New Zealand is to endorse the
fairness. Individuals with similar chargeable ability must be taxed in same manner. Given the
conjunction of three criteria of taxation policy namely efficacy, competency and equity, the
rationale for introducing a complete capital gains tax in New Zealand is justified.

8NEW ZEALAND TAXATION
Reference List:
Alley, Clinton, and Joanne Emery. "Taxation of Cross-Border E-Commerce: Addressing the
Tax Challenges of the Digital Economy in New Zealand." Journal of International
Taxation28.7 (2017): 46-55.
Fabling, Richard, et al. "Estimating firm-level effective marginal tax rates and the user cost of
capital in New Zealand." (2014).
Feld, Lars, et al. "Taxing away M&A: The effect of corporate capital gains taxes on
acquisition activity." (2016).
Gibbons, Matthew. "Government expenditure in New Zealand since 1935: a preliminary
reassessment." Policy Quarterly13.2 (2018).
Hail, Luzi, Stephanie Sikes, and Clare Wang. "Cross-country evidence on the relation
between capital gains taxes, risk, and expected returns." Journal of Public Economics 151
(2017): 56-73.
Harding, Michelle, and Melanie Marten. "Statutory tax rates on dividends, interest and capital
gains." (2018).
James, Colin. New territory: the transformation of New Zealand, 1984–92. Bridget Williams
Books, 2015.
Kelsey, Jane. The New Zealand experiment: A world model for structural adjustment?.
Bridget Williams Books, 2015.
Littlewood, Michael. "Capital gains taxes— a comparative survey." Chapters (2017): 1-29.
Mares, Isabela, and Didac Queralt. "The non-democratic origins of income
taxation." Comparative Political Studies48.14 (2015): 1974-2009.

9NEW ZEALAND TAXATION
Stantcheva, Stefanie. "Optimal taxation and human capital policies over the life
cycle." Journal of Political Economy 125.6 (2017): 1931-1990.
Thomson, David. Selfish Generations?: The Ageing of New Zealand’s Welfare State. Bridget
Williams Books, 2015.