New Zealand’s relatively small size and isolation in the South Pacific hides a deceptively impressive level of economic growth and productivity. The Pacific Island nation has the third freest economy in the world. Its low barriers to entry make it one of the easiest countries for incorporating and operating a business.
New Zealand’s commercial landscape has long operated without a capital gains tax. Despite the ruling party’s advocacy for a capital gains tax for ten years, plans to do so have been abandoned. New Zealand’s interest in supporting investment and business competitiveness has ultimately halted its capital gains tax agenda.
What is capital gains tax?
Capital gains tax (CGT) is levied off profits gained from the sale of a non-inventory asset, such as real estate or investment.
Exceptions to the CGT can vary, but typically include earnings made from betting or lottery, gifts to spouses or charity. A tax-free allowance also allows people to earn profits on sales tax-free under a certain amount.
Capital gains tax isn’t universal, but many countries enforce one at varied rates. This tax brings in revenue for the government in extra-commercial areas, technically, such as property speculation.
New Zealand’s economic ecosystem
According to World Bank’s 2018 Ease of Doing Business Index, New Zealand is the best country in the world to run a business. The country has experienced positive economic growth for 33 of the last 35 years. Its relative isolation and liberal trade policies have fostered an economy largely dependent on international trade and foreign investment.
New Zealand’s geography, multicultural society, raw materials sectors and vast international relationships offer diverse opportunities for commercial success. As such, local and foreign businesses alike thrive.
Capital gains tax a campaign promise
New Zealand’s current Government is a Coalition of three parties: Labour, New Zealand First, and Greens.
For a decade, introducing a CGT has been considered Labour’s crown jewel in tax policy. More recently, calls in favor of a CGT have pointed to its potential to mitigate a crippling housing crisis. Labour advocated such a scenario throughout its campaign for the 2017 election.
Following the elections, the victorious Labour-led coalition government established a ‘Tax Working Group’ to investigate potential reforms of New Zealand’s taxation systems.
The Tax Working Group recommended a CGT as a way to stymie property speculation harmful to New Zealand’s housing market. Property speculation has exacerbated New Zealand’s issues grappling with a growing population and increasing urban migration. This has driven housing prices up in urban areas, making homeowning increasingly unaffordable.
A CGT applied at higher rates on property sales with low holding periods (1-2 years, for example) may have slowed the property speculation machine. So why didn’t it work out?
Coalition government couldn’t reach a consensus
Keeping a three-party coalition government happy is a challenge. Though a CGT was recommended by the Tax Working Group, the ruling parties could not agree on implementing it.
Concerns centered around the economy’s buoyancy, and the impact of a CGT on business growth and investment. As an open market reliant on such elements, it became clear that New Zealand’s commercial sectors wouldn’t stomach the proposed tax.
Business and investors perceived a forthcoming CGT as sucking up available funds for investment and job growth. A CGT would also increase compliance overheads, which could scare off potential investors.
Presumably, this concern has been amplified by already-wavering business confidence as a result of the government’s strong social agenda.
Others noted New Zealand may have suffered the same strife of other countries who have implemented a CGT. Skeptics observe the trouble overseas markets have experienced in maintaining investment and keeping business confidence afloat.
What does this mean for businesses?
New Zealand’s government will likely continue to investigate possibilities for tax reform to reduce inequities. However, the decision to abandon a CGT, despite decade-long advocacy for it, is reassuring for businesses and investors. It shows commercial actors that New Zealand ultimately stands behind its stance on relaxed market entry and business growth.
With a CGT off the table, investors and businesses can rest easy. The government continues to encourage foreign direct investment (FDI) and job growth. The nation’s ease of doing business will likely see New Zealand remain in the world’s top rankings. Its supportive commercial landscape and international connectivity continue to provide ideal conditions for business and investment.
Scrapping a CGT also reinforces New Zealand’s reputation as a low-risk business environment, enabling faster and/or higher returns on investment.
Despite concerns over sinking business confidence, New Zealand experienced record-breaking FDI in 2017 following the election. This totaled more than $US3.5 billion, demonstrating the general attitude towards the country’s government and stability.
Looking to set up in New Zealand?
Although New Zealand is one of the world’s freest economies, it’s important to get help expanding into new territory. Whilst we can’t influence New Zealand’s political environment, we can help you by making sure your company formation or incorporation runs as smoothly as possible.
We offer customized business solutions in recruitment, due diligence, and commercial representation, among other services. Our New Zealand team can provide expert support and ensure a smooth transition into the impressive nation.
Reach out to us here and we’ll get back to you with a personalized strategy designed to capitalize on New Zealand’s investor-friendly landscape.