Election Tax Policies, part two

By Robyn Walker

Tax policy can decide elections, and Election 2026 may be no exception. Election campaigns inevitably involve fiscal promises, and those commitments must be funded through reprioritised spending, additional debt, higher tax or another mechanism.

With the election less than three months away, Tax Alert will be summarising what is on offer as details emerge. Last month we covered the detailed policies released by the Green Party and The Opportunity Party, and this month we consider what is on offer from the Labour Party, so far.

CGT-lite

In comparison to the substantive new taxes being proposed by the Green Party and The Opportunity Party, the Labour Party comes across as far more centrist, with a very moderate capital gains tax (CGT) proposed late last year. The capital gains tax is targeted only at commercial and residential property gains made on or after 1 July 2027. Having learned in prior election campaigns that a broad CGT has not been a vote winner, this attempt is scaled back to a level that some traditional detractors may simply shrug off; the largest criticism comes from those who want a more comprehensive tax.

The approach of targeting property has links back to the Cullen Tax Working Group. The TWG recommended a comprehensive CGT, but there was a dissenting Minority View which considered that only residential rental property warranted additional tax, whereas other asset classes, including commercial buildings, were likely to cause higher complexity, including the need for roll-over relief, compliance costs and inconsistencies that exceeded any taxing benefits. The Labour Party policy deviates from the Minority View by including commercial property in scope, and not limiting residential property to rental property.

The expected revenue from the CGT will be ring-fenced to invest in health spending, including funding three free doctor visits each year for all New Zealanders.

The detail from the policy:

• In-scope: commercial property and residential property
• Exemptions: family home (including lifestyle blocks), farms, inheritances, KiwiSaver, shares, businesses and personal items
• Commencement: Applies to gains arising from 1 July 2027
• Roll-over relief: Small businesses selling their premises to buy a bigger one will not be taxed
• Other exclusions: Transfers between spouses, civil union partners, de facto partners, or those relationships ending or on death
• Rate: Flat rate of 28%
• Taxing point: Time of sale
• Losses: Capital losses may be carried forward but can only be offset against future property gains

Comment

As far as CGT goes, this is modest, which should mitigate the extreme complexity that would come with a more comprehensive capital gains tax. Having the tax apply only to property gains after 1 July 2027 limits some of the complexity that would arise from needing to have a “valuation day” event across all assets, with rateable values being a potential proxy for market value.

However, there would still be complexity, as this is not as simple as changing the bright-line test again. While there were rules when the bright-line test was 10 years, and the existence of CGTs in other countries means there are “solutions”, those solutions come at a cost to simplicity. Opponents of CGTs will also view this as the start of a slippery slope, with the risk that more asset types are added to the tax base once the rules are introduced.

Matters to consider include:

• How will the flat rate of 28% work? Will the gains be reported in a separate return and isolated from all other income sources (i.e. not impacting on progressive tax rates) – this seems likely to be the case if the revenue is intended to be hypothecated to pay for doctor’s visits.
• If the gain is made by a company, does it then get distributed tax-free to shareholders? Will there be any option for a lower tax rate for gains attributable to owners/shareholders on lower marginal tax rates?
• While a 28% rate is lower than the top marginal tax rate, it is still a high rate for a CGT. CGTs often come with a lower tax rate to recognise that “gains” may not be true gains and may instead represent general price inflation.
• What is the “family home” when there is more than one residence in the family, including a family bach, and what evidential requirements will be necessary to support a claim for exemption? How will the rules apply to family trusts and homes that are lived in by beneficiaries?
• Where is the equity in taxing the sale of a property, but providing a permanent exemption if the property is transferred through an inheritance?
• Shares are specified as being exempt, but the policy materials include an example of the shares in a laundromat business being sold and needing to pay tax on the value attributed to the building owned by the business. We’d expect to see rules which consider whether a company is “land-rich” but not the need to slice and dice every share sale based on what underlying property assets exist.
• The policy references “small businesses” multiple times when discussing roll-over relief, but it’s not clear that rollover relief could or should be limited to just small businesses.

The revenue expected to be collected from the CGT will take time to accumulate to any meaningful amount. With that revenue already earmarked for health spending, it casts doubt over whether other tax settings could or should be revisited as a consequence of the CGT, for example, reinstating building depreciation and removing residential rental ring-fencing rules.

Small Business Action Plan

In early August, the Labour Party released details of a Small Business Action Plan, which is largely focused on tax changes. Significantly, the small business action plan is funded through the repeal of Investment Boost for all businesses.

The tax proposals are:

• Increase the low-value asset threshold from $1,000 to $10,000 for small businesses with turnover below $10 million from 1 July 2027.
• Increase the GST registration threshold from $60,000 to $80,000 from 1 July 2028.

The Small Business Action Plan also includes a proposal to require large businesses to pay small suppliers within 15 days when they are invoiced for supplies costing $25,000 or less. Large businesses will be expected to report on payment times, and small businesses will be able to report late payments to the Ministry of Business, Innovation and Employment (MBIE), with the potential for penalties to be imposed. These payment-time proposals will likely be implemented by reinstating the Business Payment Practices Act 2023, which was repealed by the current government.

The anticipated cost of the tax changes will be $1.56 billion over four years. This compares with the estimated cost of Investment Boost, which was more than $6 billion over four years.

Comment

The increase in the low-value threshold will mean that small businesses will be able to immediately expense the full cost of many assets they acquire, including phones, laptops and other basic assets. However, a $10,000 limit means that more significant purchases that might have more impact on productivity are unlikely to benefit. Under Investment Boost, almost all assets are eligible for the upfront 20% deduction regardless of price, and regardless of business size.

The proposal to repeal Investment Boost before there has been time to properly evaluate its effectiveness is disappointing, but politically, it provides the Labour Party with $4.5 billion of additional revenue that can go toward other spending promises, so it was always in danger of being low-hanging fruit. The ongoing history of political flip-flopping on tax settings will continue to negatively affect New Zealand’s ability to be seen as a stable location for investment. The current settings for Investment Boost make the deduction available when the asset is “available for use”, so businesses that are currently in the process of making investment decisions or constructing an asset will feel justifiably anxious about this policy. In Budget 2010, when “depreciation loading” was removed from assets, a decision was made to grandparent investment decisions already made and subject to a binding contract. Hopefully, we would see something similar again.

The movement in the GST threshold will be viewed positively by some micro-businesses, but can be seen as simply pushing out the point at which GST compliance costs begin. The New Zealand GST regime is very simple to comply with compared with other jurisdictions, and software tools can already materially reduce any compliance burden.

Conclusion

Tax reform is firmly back on the political agenda for Election 2026, but the details and practical consequences of what is being proposed are getting little airtime. Tax Alert will continue to monitor election tax policies as they are released.