Labour’s Capital Gains Tax will also tax inflation
New modelling from National reveals the financial impact of Labour’s punitive choice to capture inflation within its Capital Gains Tax, National’s Campaign Chair Simeon Brown says.
“When Chris Hipkins and Barbara Edmonds designed Labour’s Capital Gains Tax, they could have included a carve out for inflation, ensuring New Zealanders only pay tax on the real increase in the value of their property.
“Instead, desperate to raise more revenue to pay for its spending addiction, Labour chose to tax the lot.
“As a result, Kiwis face the prospect of paying large tax bills not because they are genuinely better off, but because inflation has pushed up the paper value of their assets over time.
“That's not taxing wealth, it’s taxing inflation.
“According to Labour’s own modelling, where house prices rise by 3 per cent and inflation sits at 2 per cent, the vast majority of the revenue collected from Labour’s Capital Gains Tax comes only from inflation rather than real gains.
“Under those conditions, a couple who buy an $800,000 rental and sell it five years later for $927,000 would have to pay a tax of $35,600. Once inflation is accounted for, that amounts to an effective tax rate of 81 per cent on the couple's real capital gain.
“Even worse, Labour's policy could leave some New Zealanders paying the tax even when they are in a worse position than when they started.
“If property prices only rise by 1.5 per cent per annum, a business owner with a $600,000 property who sells up after ten years will face a tax bill of $27,000, even though the value of their property has declined in real terms by nearly $35,000.
“Designed this way, with no carve out for inflation, Labour’s Capital Gains Tax is just theft with extra paperwork.
“There is no principled justification for designing a Capital Gains Tax that taxes inflation. It turns a tax on genuine gains into a tax on rising prices.
“The reality is that rental properties, baches, small businesses and KiwiSaver accounts will all be impacted by Labour's plans for a Capital Gains Tax.
“For New Zealanders, that means Chris Hipkins taking a larger share of New Zealanders' retirement savings and weakening their future financial security.
“The choice at this election is clear. It’s either National promising no new taxes and a plan to fix the basics and build the future, or at least nine new taxes from Labour and its mates.”
Five examples of how inflation impacts Labour’s CGT:
- Megan and Dave* bought the property for their dairy in 2018 for $550,000 and sell it this year for $753,507. Had Labour's CGT been in place, they would face a tax bill of $56,982. After inflation is taken into account, their real gain is only $25,068, meaning the effective tax rate is 227 per cent. The tax would exceed the entire real gain they made, leaving them about $31,900 worse off in real terms.
- Ngaire and Bill* bought their Raglan bach in 2021 for $1.2 million and sell it this year for $1,207,103. Had Labour's CGT been in place, they would face a tax bill of $1,989. However, inflation means they are already nearly $300,000 worse off in real terms. They would still be required to pay tax despite making no real gain.
- Raewyn* bought her Auckland rental property in 2006 for $450,000 and sells it this year for $1,155,249. Had Labour's CGT been in place, she would face a CGT bill of $197,470. After accounting for inflation, her real gain is $404,875, meaning Labour's tax would consume almost half of her real gain, with an effective tax rate of 49 per cent.
- Hemi buys a Christchurch workshop for his business in 2027 for $1.2 million and sells ten years later. Assuming annual property growth of 3 per cent and inflation of 2 per cent, he would face a CGT bill of $115,556. His real gain after inflation would be $149,906, giving Labour's tax an effective rate of 77 per cent.
- Priya and Matt buy a Wellington rental property in 2027 for $850,000 and sell seven years later. Assuming annual property growth of 2.5 per cent and inflation of 2 per cent, they would face a CGT bill of $44,907. Their real gain would be only $34,000, meaning an effective tax rate of 132 per cent. Labour's tax would exceed their entire real gain, leaving them $10,907 worse off in real terms.
*These examples are calculated on actual historical house price data. While Labour’s CGT was not in place for this period of time, they demonstrate the impact of not excluding inflation from a capital gains tax regime. The other examples are based on house price growth and inflation going forward.
