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Tax Working Group Recommendations: Still in?

Tax Working Group Recommendations: Still in?

KPMG's latest commentary on the Tax Working Group recommendations leading up to the Government's response.

John Cantin - KPMG NZ - Partner

Partner - Tax

KPMG in New Zealand


Also on


In our Tax Working Group (TWG) Final Report taxmail, we allowed ourselves time to consider the Capital Gains Tax (CGT) recommendations while the Government wrestled with its own response. KPMG have presented on the report, listened to others present, and engaged in passionate debates on its merits. It is fair to say that our judgement call depends on the discussion.

However, this taxmail provides further commentary based on that experience. It is in three parts. A discussion of some of the reasons for and against the proposals, two tables which summarise the key issues and a KPMG view.

We think that having a view on the recommendations is important. When the Government announces its response, you will need to decide whether that is good or bad. If you are a New Zealander, your vote in 2020 will, at least in part, be a judgement on the Government’s decision.

As well as providing our view, we trust that taxmail assists your consideration of the proposals and encourages you to test your own thinking.

Why a CGT is good or bad

In this section we discuss some of the arguments made for and against a CGT. This selection illustrates our view that there are counter-arguments to each proposition. It is not intended to provide the answer.

"I like the recommendations because..."


An example used in a few presentations makes the fairness point:

"Rewi works hard in the forestry industry. Over the last five years he has earned $250,000. He is automatically taxed close to $8,000 each year: over $40,000 over the five years.

Tracey is a property investor and made $250,000 gain on the sale of a rental house purchased just over five years ago. She pays zero tax."

Why aren't they taxed the same?

It is difficult to answer this with “they shouldn’t be” as they are both returns from effort and investment. However, there may be other reasons that should not be the case. They are explored in the tables as well as below.

Global environment, economy and demographic changes require reduced reliance on labour taxation

The world’s economy is changing, New Zealand’s population is aging. This will put pressure on Government to raise revenue to meet current and future spending demands. A CGT will help. However, if the CGT is used to meet Government spending, the tax will not be available to provide a revenue neutral package. The Government’s ability to use the CGT revenue to provide personal tax and savings tax cuts and business tax benefits will not be available. This suggests that if a revenue neutral package is implemented, it will only be that in the short term.

As an example, the last TWG’s recommendations were implemented as a largely revenue neutral package (GST increased, personal tax cuts and benefit changes). However, the growth in the economy meant GST, in absolute terms, has increased as an available source of funding for the Government. This can be expected to be greater than the amount provided as compensation for the change at the time.

The medium to longer term ability to meet the Government’s fiscal needs will be important for the need for additional revenue to be a justification for the CGT.

"I don’t like the recommendations because..."

The timeline is too tight to properly consider and solve the problems identified

The TWG report, including the minority report, raises many issues which need to be solved to implement a wider CGT. We agree with many that the timetable to resolve these issues is too tight. We have had many examples of detailed technical tax rules needing amendment because there has not been enough time to consider the consequences or to properly specify the policy. We cannot be comfortable that the CGT design issues can be resolved without unintended consequences.

It will penalise hard work

A CGT is said to penalise the “hard work of [insert landlord/business/farmer/entrepreneur/investor as you prefer]”. We are not convinced that this is an appropriate line to draw. Most employees would say they work hard. Every employment dollar is taxed. If the capital gain is the reward for hard work, hard work is not a reason for that reward to not be taxed.

The transition or the current asset holder problem

The valuation day approach means that the proposal is susceptible to the “you are changing the rules on me” objection. It also allows a focus on the effect on those who currently hold assets. Obviously, the prospect of tax on future gains is not particularly palatable to those who currently hold assets.

However, very few, including those who hold assets, ask what will a CGT mean if I am buying an asset?

Provided the loss rules are even handed – if a gain would be taxed, a loss is deductible – a CGT should mean that risk taking is not discouraged. This is because the Government shares in the downside as well as the upside. (Obviously, this reasoning does not apply to those whose investment decisions only ever produce a positive outcome.) This is particularly the case if there are rules which allow capital, currently non-deductible, expenses to be spread over the expected life of an asset.


The tables are intended to be high level, on a page, summaries of the issues so that they can be considered in a relatively manageable way. They do not reflect all the options available and they assume some familiarity with the recommendations.

The Key Features table considers particular features of the CGT recommended by the TWG.

The Asset Class table considers a CGT by particular asset types. The order of the asset classes is based on the minority report. The minority report considers the complexity and difficulty of applying a CGT increases while the revenue raised decreases as you work your way down the table. In their view the cost/benefit for taxing a wider range of asset classes is significantly reduced as you expand the classes. Further, the overlap between asset classes makes it harder to just include simpler asset classes (such as residential rental property) without including the harder ones (such as business assets and shares).

The pro/con column summarises arguments that have been made. The KPMG comments column provides a view on the feature or asset class.

The Key Features Table

Key features Pro/Con KPMG comment
Excluded home


Politics! Politics! Politics! 


Unfair that high value homes are excluded but lower value assets are included

Boundary problems (for example, business use of home, size of land area to be associated with the family home, number of homes that a family is able to have)

Will incentivise more investment in the family home

Despite the theoretical arguments, no one is proposing that the unfairness should be addressed by including the family home

To comply with the “no family home” requirement and minimise boundary problems, the excluded home exemption should be broad and audit activity relatively relaxed

Valuation day

(cf only new assets)


Brings assets into the tax base on day 1 making the tax take greater earlier 


Compliance costs may be significant

Generates concern regarding the impact on existing decisions and assets (“I wouldn’t have invested/I am being penalised for investing”)

Grandparenting existing assets also has a compliance cost (tracking ownership to ensure the asset retains its status, identifying all assets held on day 1 which would qualify)

Needs a “relaxed” approach to audit activity or clear requirements for a valuation to be acceptable. Possible solution is for Inland Revenue to prove otherwise if valuations (and valuers) meet an acceptable threshold

No indexation and marginal rates


Less complex

Compensates the Government for time value of money compared to an accrual regime but effective tax estimated to still be at a lower tax rate than an accrual basis


Inflation gains and not real gains are taxed

Means some income will have a higher average tax rate than would otherwise be the case

Simple is better particularly as, if capital gains are indexed, other income should also be indexed.


Government shares in the downside of investment and entrepreneurship

Reduces the need for capital/revenue boundaries to continue


The tax take is more volatile in line with the economy

The urge to limit loss offsets or their use at all should be resisted unless there is clear evidence of a problem.  Taxing capital gains should mean that capital losses are treated in the same way.

The Asset Class Table

(Asset Class in increasing order of complexity and difficulty in applying a CGT but decreasing tax take)

Asset Class
Pro/Con  KPMG comment
Residential rental property


Returns less than bank deposits so gain is part of the return

Most tax collected for simplest change

Gains funded by tax deductions (i.e. interest is deductible) are taxed


Potential impact on retirement savings

Impact on rents (increases) and property prices uncertain

Likely to proceed as supported for the most part by the minority and can be done in the timetable

Needs work to confirm that a clear border can be defined between residential rental and commercial property
Commercial property


The wider the asset base covered the more neutral the tax system is to investment choices


Extending to this asset class is tied to business assets (due to overlap of value where commercial property is used in a business)

Design problems for property PIEs need to be solved

May depend on whether business and share issues can be solved
Business assets


The wider the asset base covered the more neutral the tax system is to investment choices


Extending to this asset class is tied to shares (as businesses use companies).

Potential impact on retirement savings

Reduces the willingness to be entrepreneurial because it reduces the returns to investment

Needs more work to consider the impact on carrying on a business including:

— What can be learned from other countries?

— What is the best evidence for whether a CGT will impact on business activity and what does that mean for having a CGT or not?

Australia and New Zealand shares

- Unlisted

- Listed


The wider the asset base covered the more neutral the tax system is to investment choices.

Allows imputation regime to continue more easily


For unlisted shares and groups of companies, a variety of problems need to be solved including double taxation and double deductions

For listed shares, will impact capital markets and means the Government takes on market risk

PIEs have to be taxed on accrual basis which is different to direct investment

Needs more work to consider the impact on:

— What can be learned of the impact from other countries?

— What is the best estimate of the behavioural changes?

— How will capital markets be affected?

as well as designing the tax rules to answer the problems raised

Other foreign shares (no change to existing FIF regime)


Reduces Government’s exposure to foreign equity markets and volatility in the tax take


Creates a disadvantage for investment in Australasian companies?

Needs more work to consider the impact on capital markets and whether including foreign shares in the CGT regime would address those impacts

KPMG Conclusion

So where do we sit?

Residential property - yes

As the asset table suggests, a CGT on residential rental property is the most likely to proceed.  This was supported by the whole of the TWG.  Workable rules can be determined in the time available (for an assumed 1 April 2021 commencement). We agree that the arguments for residential rental capital gains and losses being taxed support a change.

Other asset classes – proceed carefully over time

New Zealand has a history of progressively removing the capital/revenue border.  There is a long list of capital gains which are currently taxed.  The driver for past changes has been the ability to generate capital rather than revenue (taxable) gains and the argument that both are returns from investment.

For example, a major feature of our tax system is the taxation of financial arrangements.  Since 1986, there has been no distinction between capital and revenue gains, they are all taxable.  (However, some capital losses remain non-deductible).  The change was made after consultation and detailed rules were drafted. The same process needs to be followed for CGT.

For other asset classes, further work is required before a CGT is implemented.  There are concerns that need to be addressed:

  • Broadly, there are design problems which need to be solved.  The solutions are not simple.
  • Potentially adverse responses ( for capital markets, investment and business creation) need to be considered.  Although it is unlikely that New Zealand can run a real world experiment to test the behavioural responses to a CGT, we can gain a better understanding of the likelihood of particular responses.

We would start the further work with the taxation of shares.  This asset class raises the more difficult design issues and has potentially the most adverse impact (through the effect on capital markets).  If these issues can be solved for shares, then the other asset classes can be considered.

If the issues cannot be resolved, for the particular asset class, the answer would be that the capital gains and losses should remain untaxed.

This approach necessarily means that the timetable needs to be extended.  A 1 April 2021 start date is too ambitious for other assets.  Recognising that an election will intervene, even a 1 April 2022 start date is difficult.  It should be the earliest target date. 

Future impact

Implementation of a CGT raises the question of the overall balance of the tax system:

  • Are tax rates and thresholds still appropriate? 
  • Are current timing rules still required? 
  • Can simplification (by removing rules designed to protect the tax base in the absence of a capital gains tax) occur?

These questions should be included in the further work to be done on other asset classes.

Will this approach happen?

The answer is the same as the argument for excluding the family home – politics!  The position of the Opposition and the potential impact on the 2020 election impact a decision to proceed in full or in part or to phase the decision further. 

The Government’s assessment of the politics will determine whether a good tax policy process can be applied.

The TWG’s packages

The CGT decision does not sit in isolation.  A full CGT may be acceptable depending on how the revenue is used.  Our taxmail considered option 2 the best.  It seeks to achieve a variety of objectives which balances further improving business taxation with personal tax changes and savings incentives. 

We remain of that view but, if our preferred approach of phasing the decision is taken, the benefits of option 2 are likely to be phased over a longer period of time.  Whether phasing is required will depend on how well the New Zealand economy does so that Government revenue from other taxes allows earlier implementation of the package.

In the alternative, option 3, which is more savings focussed has some attraction.  This assumes that it will help to address future increased demand for Government spending.

Your response

The TWG’s tax experts were split in their support for the TWG’s recommendations. The answer to whether a CGT is good or bad for New Zealand is a matter of judgement. (It will obviously have different and clearer impacts for individuals).

It requires weighing up perceptions of fairness, neutrality of the tax system to different types of gains and investments, the cost of compliance and administration, the potential for adverse behavioural responses, the potential for loss in value of assets and the potential to encourage (or discourage) investment. The weighting given to any one element will vary.

We hope that our commentary has helped you ask the right questions in coming to your conclusion on the recommendations.

We would be pleased to discuss the recommendations and the Government’s response (when revealed) with you.

Please do not hesitate to contact us.

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