How would a capital gains tax work, and what would it mean?

Whether New Zealand should have a capital gains tax (CGT) is one of those debates that doesn't seem to go away - no matter how much politicians might like it to.

As a new poll shows two-thirds of respondents support a CGT in some form, one tax expert says it could be the Prime Minister's high-profile property sales bringing the issue to the forefront of people's minds.

Here are six common questions - and answers - about how a CGT might work

Why have a CGT, anyway?

There is an argument that there is inequity in the way we treat different types of income at the moment.

Income from work is taxed, but income from assets is often not.

At the moment, if someone does not buy a residential investment property, for example, with the intention of selling it, and holds it for at least two years, they do not pay tax on any value gain they make when they sell it.

Tax expert Terry Baucher said Prime Minister Christopher Luxon's recent high-profile rental property sales might have drawn attention to the issue.

"Accidentally or not, the prime minister's sales of property probably sparked it up again."

People were increasingly aware that the country needed more tax revenue, he said, and there were questions of fairness around how that was sourced.

He said it seemed politicians were lagging the public on the issue. "We need to perhaps start talking about the amount of property politicians own."

Simplicity chief economist Shamubeel Eaqub said the country needed a wide-ranging conversation about what counted as income for tax purposes.

"We're starting from this weird thing of saying 'if you have a job and you earn a wage, that's income, but if you have an asset and it appreciates in value, that's done by your hard work and is not taxable'.

"You can't tax that, that's precious or sacred."

Would it discourage investment?

Finance Minister Nicola Willis has said she believes a CGT would discourage people from investing.

In advice provided to the then-Minister of Finance and Minister of Revenue related to the Tax Working Group, Inland Revenue said at a high level there was no evidence of outright reduction in gross fixed capital formation or GDP growth in countries that implemented a CGT.

Per capita GDP growth was higher in the five years after the introduction of a CGT in Canada, South Africa and Australia. This may have been affected by the timing of the business cycle - but "some critics of extending the taxation of capital gains have at times seemed to suggest that doing so would do catastrophic things to the economy. That is not at all apparent from looking at headline numbers," the briefing paper said.

Eaqub said it was not clear that there was less entrepreneurship or fewer businesses starting in countries with a CGT.

"People are not motivated by tax, it's at the margin. It shouldn't be such a distraction that it stops you from doing things."

He said there could be benefits if people were encouraged to keep their money in businesses and have them grow. "To say that people will stop starting businesses to me is extraordinarily hyperbolic and does not bear any resemblance to reality."

Alan McDonald, head of advocacy at the Employers and Manufacturers Association, said businesses had concerns about the prospect of

paying CGT on unrealised capital gains. Labour has talked about the prospect of a wealth tax that could include unrealised gains.

"There is also a school of thought that a CGT on property will increase the incentive to invest more in businesses or active rather than passive investments. Given there is already a CGT on investment properties, that doesn't seem to have shifted the business investment dial at all," McDonald said.

Baucher said people needed to remember that not taxing things also created behavioural incentives, as much as taxing could. "That is in my view where we've got to with not taxing property."

Would it mean someone could sell a house and not be able to buy another at the same value, because of the CGT bill?

All discussion of a CGT in New Zealand to date has included an exemption of people's own homes, but there could be a situation where someone who sold a rental property for $500,000 could not buy another for $500,000 because of the tax involved.

Eaqub said that could mean people were more inclined to hold on to their rental properties for longer.

"You'd be more likely to want to hold on than to flip, which is kind of why the bright-line test [which applies to rental property owned for less than two years] was brought in, in the first place.

"People forget that when the National government brought in the brightline test it was essentially a capital gains tax. If you removed the time limit it would become a fully fledged CGT."

Baucher said people often incorrectly thought a CGT would apply to the entire selling price, rather than just the gain.

Sarina Gibbon, general manager of the Auckland Property Investors Association, said a CGT was worthy of consideration but it should apply to all asset classes and not be specifically targeted at property.

"Given the exponential speed at which wealth can be accumulated through capital, I think a broad-based capital gains tax will help redistribute wealth equitably. More importantly, it will give young people, who often start off life with little or no equity, a fighting chance at achieving economic security in their lifetime.

"But in New Zealand, we tend to have a very myopic way of looking at a CGT: it should only be applied to real estate. I am against that. I think a fairer way to address the economic power imbalance between the asset class and the wage class is to consider a comprehensive capital gains tax across all asset classes. "

What about KiwiSaver?

Some people have questioned how a capital gains tax would apply to savings in KiwiSaver,

Eaqub said that came back to the question of what was in and what would be out of the regime.

But he said there were good reasons why further tax might not be applied to KiwiSaver.

"If you pay tax on the way through, when you're getting returns, you've already paid tax and there should be no further tax to pay.

"If you haven't paid tax, for example on the value of a growing business, then it should be included."

The Tax Working Group's final report said it did not see a case for "radically transforming" the taxation of retirement savings but it would support an increase in benefits for low and middle-income earners through KiwiSaver to encourage people to save more for retirement.

Baucher said New Zealand was unique in that it taxed gains within retirement savings accounts as returns accrued. "If we were introducing capital gains tax we might look at that as part of the whole thing. It would be a big step and you would want to look at it as part of what else we need to do."

Wouldn't we all end up paying 39 percent on gains?

The brightline test applies tax on capital gains at an individual's marginal income tax rate when they sell a rental property within two years.

That can mean that often a rate of 39 percent applies, which is high by international standards for capital gains tax.

It would be possible that a capital gains tax could be set at a lower rate.

Baucher said there was an argument that taxing at the marginal tax rate would also not account for inflation.

"You might choose to do what the Australians and Americans do - if it's a long-term gain held for more than 12 months, they tax only half of it but at the income tax rate so you effectively get a 50 percent discount."

"You could tax non-residents differently."

Isn't it just another tax?

Eaqub said there was a misconception that a CGT would just be more tax to be paid rather than a tax that might allow the country to reduce other taxes.

"It's not necessarily about how much tax we pay but who bears the cost."

He said the country had to decide on things like what services were required, to determine what tax take was needed in total. "The secondary question is when we want those taxes how should we collect them and who should pay...at the moment it falls on people between the ages of 30 and 64, the workers who have most of the income and most of the expenditure."