The shark already has teeth: Looking at the facts around capital gains tax in NZ

A little-known fact: don’t touch a dead shark’s teeth.

In the early days of YouTube, I remember watching a seasoned fisherman get bitten by a dead shark. You would think, given his profession, he had read Eugene Kaplan’s Field Guide to Coral Reefs, which cautions against putting your hand in the mouth of a dead shark as it can, but not always, result in a reflex biting action.

It is with the same amusement I find myself watching the political debate raging around whether New Zealand should adopt capital gains tax.  This reflects that it appears a key fact being completely lost on our esteemed politicians is that New Zealand already has a capital gains tax regime. However, just like the dead shark, it bites selectively.

Under existing tax law, if an investor acquires an asset with the intent of selling it for profit, any resulting gain is taxable income. The complexity lies not in the rule itself, but in how intent is interpreted by Inland Revenue.

Take for instance crypto assets like bitcoin and precious metals like gold.  Inland Revenue are quite happy to take a tough line stance and say that the only possible “intent” in buying these assets is to make a capital gain when they are sold.   They then insist that people pay tax on any capital gains.  I assume their view stems from the fact that these assets pay no income or dividends, so Inland Revenue has simply jumped to its own conclusions about intent.

Before the introduction of Portfolio Investment Entity (PIE) regime in 2007, the same reasoning applied to New Zealand share funds: since they were in the business of investing in shares, Inland Revenue said their intent must have been to profit from capital gains. When the PIE regime was enacted, the Government explicitly exempted New Zealand share PIE funds from capital-gains tax to give investors — particularly in KiwiSaver — certainty of this tax treatment. The exemption itself is clear evidence that New Zealand has long operated a capital gains tax framework.

In contrast, when it comes to individuals investing directly in New Zealand shares, Inland Revenue’s interpretation of “intent” becomes less consistent.  But let’s dig into the validity of this. The wider share market, as represented by the S&P/NZX 50 Index, has a weighted average dividend yield around 3.0% (as at 30 September 2025) and some shares, much like bitcoin and gold, do not pay a dividend at all.  Given the risks associated with investing in NZ shares it would be impossible to justify why any rational person would invest in shares unless they expected to get a materially higher return than just the dividend yield.  The only other source of returns is capital gains, so this fact supports taking a position of saying that all investors holding direct shares must have an intent to make capital gains. Yet IR has tended to take a more lenient view.

That leniency is not guaranteed. Inland Revenue recently got a taste of success in terms of taking a harder line around collecting tax.  Recently, the media published comments from Inland Revenue saying it had pulled in $12 of tax for every $1 it had spent on chasing money from people.  Undoubtedly Inland Revenue would enjoy a great influx of tax revenue if it took a harder line in terms of testing people’s intent when they invest into assets like NZ shares.  Those investors in bitcoin and gold will be able to attest to the fact that Inland Revenue is quite capable of imposing its own view about what an underlying investor's intent is in owning assets.

I am picking that there would be very few people who would be hugely surprised if Inland Revenue took a hard line in saying that it believed investors had a natural intent to make gains when they invest directly in NZ shares.  This reflects that to argue otherwise undermines the logical investment case as to why you would hold these more-risky assets. 

Further, in a modern world Inland Revenue can quickly see where all the investors are who own things like NZ shares directly.  This information resides on the administration platforms used by wealth advisers, online share platforms, and in the registry systems of our listed companies.  When Inland Revenue decided that investors in crypto assets like bitcoin should pay tax on their capital gains, they proved to be very effective and efficient in quickly chasing down information on individuals who had made gains.

Investors in PIE funds can take comfort in knowing their capital gains on New Zealand equities remain tax-free. Investors holding New Zealand shares directly are needlessly taking a risk that Inland Revenue remains lenient when it comes to forming a view about what their “intent” might be.   In future, one option that politicians could take is to say “rather than introducing new taxes, let’s just agree that the intent of this group of investors must be to make capital gains.”  It is simple to imagine a politician chewing the ear of the Inland Revenue management team about taxing the gains people had made on different components of their investment portfolio.

And this brings us back to politics.  While the headlines scream that capital gains taxes might be being introduced, this isn’t that factually correct.  What is being proposed are rules around a “fact pattern” which would then result in a person needing to pay tax on certain assets.  For example, Labour’s proposed property tax is just a set of rules around a “fact-pattern” that will result in a person needing to pay tax on their capital gains.  They are saying that in this set of circumstances the new rules result in the fact that someone has a primary intent of making gains.

The real truth about capital gains is that policy wise, the shark already has teeth and even has plenty of hands in its mouth. It just hasn’t bitten….yet.