Labour’s CGT: A Policy That Sounds Fair — Until You Look Closely
New Zealand Labour Party has recently announced a capital gains tax (CGT) proposal, positioning it as a fairer way to tax wealth in New Zealand. After internal debate between a wealth tax and CGT, caucus reportedly voted almost unanimously for the latter.
Under the proposal, from July 2027, investment property — both residential and commercial, but excluding family homes and farms — would be taxed at 28% on any capital gain realised on sale. Importantly, the tax would apply only to investment property. Shares, businesses, and other assets are excluded.
This makes the proposal a rifle tax, not a broad-based reform. It also reinforces Labour’s long-standing ideological preference to discourage investment in property. One Labour source described investment property to me as “a cancer in NZ” and argued capital needs to be freed up for “productive sectors”. I fundamentally disagree.
Stopping people investing in property will not free up capital for other investments. It will push capital offshore, reduce rental supply, and ultimately drive rents higher.
The Inflation Problem: Taxing Phantom Gains
On the surface, CGT sounds simple. Sell an investment property with a $100,000 gain, pay $28,000 in tax. Done.
But this simplicity masks the most egregious flaw in Labour’s proposal: there is no inflation adjustment.
This means investors are taxed on nominal gains, not real gains.
Example
Purchase price (2015): $500,000
Sale price (2025): $900,000
Holding period: 10 years
Average inflation (CPI): ~2.5% p.a.
Nominal gain
$900,000 − $500,000 = $400,000
Inflation-adjusted cost base
$500,000 × (1.025)¹⁰ ≈ $640,000
Real gain
$900,000 − $640,000 = $260,000
Labour proposes taxing the $400,000, not the $260,000.
That extra $140,000 is not profit — it is inflation. Taxing it amounts to a wealth tax on equity, whether Labour admits it or not. It is unfair, opaque, and deliberately difficult for the average voter to understand — which is why it glides through left-leaning media with little scrutiny.
Australia, by contrast, provides a 50% CGT discount for assets held longer than 12 months. It’s an imperfect proxy, but at least it acknowledges inflation. Labour’s proposal does not.
The Timing Problem: Distorting Behaviour Before the Tax Even Exists
Although the tax is not retrospective, the announcement itself creates immediate distortion.
Investors now face a binary choice:
Sell before July 2027, or
Hold indefinitely and pay 28% later
This creates a two-phase market distortion:
Pre-2027: accelerated selling, downward pressure on prices
Post-2027: reduced turnover as owners avoid triggering tax
Given current market conditions — flat prices, high interest rates, soft demand — this policy is unlikely to raise meaningful revenue in its early years. What it will do is disrupt behaviour for little fiscal gain.
There is also no clarity from Labour on capital losses. In most CGT regimes, losses can only offset future gains, not income. If prices remain subdued, Labour may be legislating a tax that raises very little money while creating substantial friction.
The Borrowing Trap: Encouraging Debt, Not Productivity
CGT does not force capital to move — it encourages people not to sell.
If a property increases from $1m to $1.5m, selling triggers a $140,000 tax bill. Borrowing against the increased equity does not.
So rational investors will:
Retain the property
Refinance
Extract capital via debt
Avoid CGT entirely
This is not hypothetical. It is exactly what has happened in Australia. CGT incentivises leverage, not reallocation. It locks wealth into property while increasing household debt — the opposite of Labour’s stated objective.
The “Mansioning” Effect: Fewer Rentals, Bigger Houses
CGT exempts owner-occupied homes but taxes future rentals. This creates a perverse incentive.
Instead of:
Keeping an existing home as a rental and upgrading modestly
People will:
Sell the exempt home
Pour more capital into a much larger, tax-free owner-occupied property
The result:
Less rental stock
More capital tied up in luxury housing
Higher rents over time
This behaviour is entirely predictable — and entirely ignored by the policy.
The Lock-In Effect: Entrenching Intergenerational Wealth
CGT creates what economists call a lock-in effect. When selling triggers a large tax bill, people simply don’t sell.
Over time:
Assets are held longer than economically optimal
Wealth becomes entrenched
Trusts and estate planning explode
Intergenerational inequality increases
The wealthy can afford advice to minimise exposure. Ordinary investors cannot. A policy sold as redistributive ends up reinforcing the very wealth structures it claims to dismantle.
The Compliance Nightmare
Full disclosure: as the owner of an accounting practice, CGT would be very good for my business.
It would be terrible for taxpayers.
Every property would require:
Long-term record-keeping
Cost-base calculations
Valuations
Dispute resolution
IRD would need more staff. Compliance costs would rise. Productivity would fall. Lawyers and accountants would do well. Everyone else would be poorer.
This is not efficient tax design.
Broader Economic Consequences
Reduced liquidity
Fewer transactions, less mobility, poorer capital allocation.
Capital flight
Property investors will shift capital offshore — especially since shares are exempt.
Market inefficiency
Tax becomes the primary driver of investment decisions, not fundamentals.
The Perfect Storm: CGT + Wealth Tax + Interest Non-Deductibility
Labour is also signalling a return to interest non-deductibility.
Combined with a non-inflation-adjusted CGT, this is effectively:
A capital gains tax
A wealth tax
A cash-flow tax
All targeted at one asset class.
This is not reform. It is a coordinated attack on property investment — an asset class that supplies housing and underpins retirement security for hundreds of thousands of New Zealanders.
The result will be fewer investors, less supply, and higher rents.
When Good Intentions Meet Reality
I am not opposed to tax reform. New Zealand’s system can and should improve.
But good policy requires understanding second- and third-order effects. It requires learning from overseas experience. It requires economic modelling, not slogans.
Labour’s CGT risks achieving the opposite of its stated aims:
Capital is locked in, not freed up
Wealth is entrenched, not redistributed
Inflation is taxed as profit
Debt is incentivised over productivity
Winning Votes vs Governing Well
Taxing a small group heavily and redistributing modest amounts to a larger group is electorally attractive. You gain votes and lose none.
But it is not good long-term policy.
In the end, renters will pay — through higher rents and reduced supply. Investors will adapt. Capital will move. The economy will distort.
A Better Path Forward
If Labour insists on pursuing CGT, at a minimum it should:
Tax real, inflation-adjusted gains
Apply rules consistently across asset classes
Phase the tax in gradually
Model behavioural responses honestly
Better still, it should ask whether CGT is the right tool at all.
A Final Reality Check
All of this assumes Labour wins the next election — which is far from certain.
Many voters remember:
$90 billion of spending
14,000 new public servants
A more divided country
Weak productivity outcomes
If you are pro-business, pro-investment, and serious about keeping rents down, the alternatives are clear:
ACT Party, New Zealand National Party, or New Zealand First.
Everything else is noise.
New Zealand deserves tax reform that works in practice — not policy that looks good on paper and unravels in reality.