Prev이전 문서

Next다음 문서

크게 작게 위로 아래로 댓글로 가기 인쇄


Prev이전 문서

Next다음 문서

크게 작게 위로 아래로 댓글로 가기 인쇄

Justifiability of not taxing Capital Gains

< Country study: New Zealand >


                                                                           Mijee-Lee (Law,



New Zealand is one of the unique countries in the Organisation for Economic Co-operation and Development (OECD), as it does not have a capital gains tax. The absence of a capital gains tax has attracted socio-political and economic discussions over the past decades on the issues of justifiability. This opinion argues that exclusion of capital gains in the New Zealand income tax base is unjustifiable in principle. It submits that the absence of comprehensive capital gains tax (CGT) undermines New Zealand’s ‘broad-base, low rate’ (BBLR) approach to taxation and creates inequities in treatment between income and capital gains. While it acknowledges some political and administrative challenges in implementing an economically pure comprehensive CGT, it argues that taxing capital gains would help New Zealand achieve greater progressivity.


Current tax treatment of capital gains

The New Zealand Income Tax Act 2007 (the Act) defines taxable income according to the ‘ordinary concepts’ in s CA 1(2). [1] The judiciary has established a threefold test for assessable income, which is based on the capital or revenue distinction; the nature of the activities and the intention with which the taxpayer engages in those activities.[2] While capital receipts are generally exempt from taxation, there are specific statutory inclusions to capture some capital gains. Such include capital gains from profits from sale of land within two years of acquisition is taxable under the two year bright-line rule.[3]Also gains from disposing personal property are taxable if acquired for the purpose of disposing it or if the taxpayer’s business is to deal in that property of that kind.[4] It can be observed that the current treatment of capital gains is incoherent in nature, with a potential scope for inequities between income and capital gains. The exclusion of the aggregate capital gains in the income tax base undermines New Zealand’s Inequities in treatment between income and capital gains.

BBLR approach to taxation and creates inequities in treatment between income and capital gains. Contrary to the philosophy that is at the core of New Zealand taxation, exempting capital gains does not expand the tax base and consequently does not lower the rates across the board.

This discriminates certain receipts of payments against the commonly accepted revenue payments that are included in the income base, thus effectively discriminating different groups of taxpayers and violating horizontal equity. This can be better illustrated through a juxtaposition between the current tax treatment of gains from land transactions and income from employment. Currently if a taxpayer disposes a property for profit, the capital gains made will not be taxed on the capital receipt provided that: the sale transaction took place after two years of acquisition; it did not constitute a business activity; and the taxpayer did not purchase for the purpose of disposal. In contrast, another taxpayer who makes the same amount in wages must pay tax, as the tax component of wages is deducted before wages are transferred to the employee.

On the grounds of horizontal equity, it is unfair that taxpayers in similar economic situations bear different tax burdens because one form of payment is taxable while the other is not. The current tax treatment, which is in favour of capital receipts, distorts the taxpayers’ economic decision-making towards investment in capital assets. Huang and Eliffe in support over the view suggest that taxpayers can derive lower rates of return on capital assets and still be better off after tax than if they had earned higher yields, which is subject to income tax.[5] This underlines that investments in capital assets increase the taxpayers’ ability to pay and convert more of their income to capital. Therefore, capital gains should be incorporated in taxable income to impart greater burden of tax on those who has greater ability to pay, to achieve vertical equity and progressivity.


Challenges or excuses

Due to administrative difficulties and political sensitivities in taxing capital gains, there have been concessions to taxing capital gains on realisation rather than on accrual and exempting primary family homes from the capital gains tax base proposal.[6] Not taxing capital gains because accurately accounting for the gain component of capital receipts is difficult because of inflation is unjustifiable. Cadelis argue that many sources of income in New Zealand are not compensated for inflation, therefore compensating capital gains for inflation would compromise equity. [7] Inflation issue can be addressed by taxing all receipts of income at a taxpayer’s marginal income tax rate.

Moreover, exempting primary residences from the capital gains tax base for the sake of political palatability is unjustifiable. Family homes should be given the same treatment as other investment properties. This is because tax exemptions come with the opportunity for manipulation and the exclusion of family homes may result in a mansion effect, where homeowners would invest extravagantly in their family homes and sell after two years without any tax liability on the gains made. This would result in tax treatment in favour of residential properties where more investors would invest in residential land to benefit from the tax exemption. Having a precise definition of what constitutes a primary residence and providing a tax cut for the sale of family home up to a certain threshold may mitigate potential abuse of the tax system. Nonetheless, simply excluding family homes because of political sensitivity of the homeownership is unacceptable.



The opinion concludes that excluding capital gains in the capital gains tax base undermines the BBLR approach and creates inequities in treatment between income and capital gains. It suggests that the administrative and political challenges addressed do not outweigh the need to implement a capital gains tax to achieve greater progressivity.






The Income Tax Act (2007) New Zealand



Chye-Ching Huang and Craig Elliffe (2010) “Is New Zealand Smarter than other countries or simply special? Reconsidering a realization-based capital gains tax in the light of South Africa’s experience” NZJTLP Vol. 16

Stephanie Cadelis(2011) “A critique of Labour’s recent capital gains tax proposal” Taxation TodayVol, 42

[1] Income Tax Act 2007, s CA 1(2).

[2] Section CB 1.

[3] Section CB 6A.

[4] Section CB 4 and CB 5.

[5] Chye-Ching Huang and Craig Elliffe. (2010) “Is New Zealand Smarter than other countries or simply special? Reconsidering a realization-based capital gains tax in the light of South Africa’s experience” NZJTLPVol. 16 pp.269-272.

[6] At 273.

[7] Stephanie Cadelis” (2011)x “A critique of Labour’s recent capital gains tax proposal” Taxation TodayVol. 42 pp.3-5.

List of Articles
번호 분류 제목 글쓴이 날짜 조회 수
공지 영미법 법학 관련 유용한 사이트 모음 mj 2018.03.07 17
공지 국제법 국제법 관련 참고할만한 사이트 모음 mj 2018.01.24 50
17 영미법 [미국법] ATS 와 TVPA 비교 mj 2018.04.03 46
16 국제법 세계적 율법주의 (Global Legalism) - 에릭 포스너(Eric Posner) mj 2018.03.13 106
15 미국 연방 항소법원 (US courts of appeals, circuit courts) mj 2018.03.07 111
14 영미법 미국사법제도의 이해 - -연방법원에서의 소송 mj 2018.03.07 244
13 국제법 라그란트 사건(LaGrand Case, ICJ, 2001) mj 2018.01.31 155
12 국제법 [법조라운지 커버스토리] “국제법을 평생의 업으로”…백진현 국제해양법재판소장 mj 2018.01.05 56
11 국제법 [조효제의 인권 오디세이] 국제인권법의 탄생 1 mj 2017.11.30 58
10 국제법 [인권문헌] 국제인권규약 - 시민적 정치적 권리에 관한 국제규약 (B규약) mj 2017.11.30 102
9 국제법 [기사] “이제는 총칼 아닌 국제법 조문 한 두 개로 국가가 난관 봉착하는 시대입니다” mj 2017.11.25 108
8 국제법 국가책임에 관한 협약 초안 2 mj 2017.11.25 689
7 국제법 Political Science Research on International Law mj 2017.11.19 2708
6 국제법 국제인도법 | International humanitarian law mj 2017.11.19 31
5 국제법 국제인권법 | International law of human rights file mj 2017.11.18 373
4 국제법 국제형법 | International criminal law mj 2017.11.18 194
3 국제법 국제관습법 | Customary international law file mj 2017.11.18 211
2 국제법 국제공법 (International Public Interest Law) 개념 1 file mj 2017.11.18 234
» [우리가치 11월/7호] Justifiability of not taxing Capital Gains –Country study: New Zealand WalkerhoduJ 2017.11.05 47
Board Pagination Prev 1 Next
/ 1