Bright-line test vs Labour’s capital gains tax: Are we just arguing over names?

Wednesday, 19 November 2025

Labour Party leader Chris Hipkins, alongside his finance and economy spokesperson Barbara Edmonds, announces a policy that will see a Capital Gains Tax fund some GP visits.

Capital gains on houses are already taxed under the (bizarrely named) bright-line test which National brought in 10 years ago. So how different is Labour’s capital gains tax? Lloyd Burr takes a look.

When Finance Minister Bill English unveiled Budget 2015, the headlines focussed on an unexpected $790m child hardship package, a Children’s Action Plan and more money for Child, Youth and Family.

There were other surprises too: a scrapping of the $1000 KiwiSaver kickstarter, a new border levy, and the opening up of Crown land in Auckland to build more houses.

English dubbed it the ‘Boring Budget’, while then-3 News political editor Patrick Gower called it the ‘Tricky Budget’ because a new tax was being introduced by a government that had promised no new taxes.

But under the ‘Housing’ section on the official Budget summary, there it was, introduced as the fourth bullet point:

“A new ‘bright-line’ test will be introduced for non-residents and New Zealanders buying residential property,” it read.

“Under this new test, gains from residential property purchased on or after 1 October and sold within two years will be taxed unless the property is the seller’s main home, inherited from a deceased estate or sold as part of a relationship property settlement.”

Budget day wasn’t actually the policy’s first outing. Then-Prime Minister John Key had quietly debuted it at a regional National Party event a few days earlier.

But it had pretty much slipped under the radar - somewhat surprisingly given the absolute frenzy capital gains tax policies had caused at both the 2011 and 2014 elections.

By November 2015, the Taxation (Bright-line test for Residential Land) Bill passed its final reading in Parliament and the law has remained ever since, albeit with tinkerings to the ownership timeframe (more on that later).

Given the bright-line test (BLT) is a tax on the gain made when selling a house, is it actually another name for the much-maligned capital gains tax (CGT)? And if it is different, how does it stack up against Labour’s proposed CGT?

John Key unveiled the bright-line test policy at a National Party regional conference in May 2015.

Let’s compare.

The current bright-line test

After unveiling the BLT, Key was quick to say it was not a CGT. He said it was needed by the IRD to clarify a grey area of income taxation relating to property speculators.

That grey area allowed those who bought and sold houses to make an income, to avoid paying tax because it was difficult for the IRD to prove intent.

There were clear rules for property developers to pay tax, land developers to pay tax, and builders to pay tax, but not property speculators who could come up with a myriad of excuses and explanations about why they were buying and selling. It was too hard for IRD to police.

“It was just brought in to make Inland Revenue's job easier in terms of determining if somebody purchased a property with the intention of resale,” says Deloitte tax expert Robyn Walker.

“They needed to take the onus off IRD to identify an intention of resale for those who were regularly buying and selling properties and should be subject to tax.”

So Key’s government rolled out a policy that aimed to define simply what counts as someone buying a house with the purpose of selling it, and forcing them to pay the top marginal income rate on the gain.

They took the name ‘bright-line test’ from US policy-making which relates to something clearly defined, with little room for misinterpretation or manipulation.

That policy was, if you sold a residential property within two years of buying it, you’d have to pay tax on the gain you made from doing so. Exemptions included your primary residence, farms, commercial properties, retirement units and inherited properties.

“Under New Zealand law,” says tax specialist Neil Russ, “if you buy something with the intention of selling it, then that's subject to income tax and you're going to be paying tax on the gain”.

“Technically, it's exactly like a capital gains tax, but it isn't imposed in the same way as a capital gains tax is. In practice, it's a tax on the gains made, which feels very much the same,” Russ says.

Labour’s tinkering

After Labour came to power in 2017, they made a number of changes to the BLT during their two terms in power.

Jacinda Ardern ruled out a CGT, but her government extended the BLT timeframe to five years, and then to 10.

In 2018, they extended the BLT timeframe from two years to five years, and in 2021 extended it again to 10 years for existing properties but kept it at five years for newbuilds.

Both changes have now been dropped, with the test reverting back to the original two-year timeframe.

Labour’s proposed capital gains tax

The Labour Party has walked the CGT line a few times before, but it’s either tripped them up or they’ve fallen off it. They’re giving it another go heading into the 2026 election.

Under the proposal, the BLT will be scrapped entirely and replaced with a CGT.

Here are the key differences:

The proposed CGT would carry no two-, five- or 10-year time limit. No time limit at all. It would not matter how long you’ve owned the property.
It would cover all residential properties and commercial properties. The BLT does not.
The tax rate would not be the marginal tax rate like under the BLT. It would be set at 28%, the same as the company tax rate.
The CGT would only apply for gains made after July 1, 2027.
The BLT exempts your ‘main residence’ (the one in which you spend at least half your time living in). The CGT would use the term ‘family home’ instead, which could make it open to interpretation.

Here are the similarities:

Farms are exempt from the BLT and would be under the CGT.
Other things would be exempt from the CGT too - things like shares, business assets (although questions remain, see below), KiwiSaver (which is subject to tax anyway), inheritances, gifts, artwork, cars, boats and furniture.

But there are complexities too:

Deloitte’s Robyn Walker says the proposed 28% CGT rate is quite high compared to other countries.

Labour’s CGT policies failed to win voters in 2011 and, under David Cunliffe, in 2014.

“The reason why other countries will go with a lower rate is to try give some sort of concession for inflation. Because as your house price rises, some of it might be an actual, genuine gain, but actually a lot of it is just price inflation, and so you haven't actually made as much gain as it looks like,” she says.

Walker also says problems will likely arise around the sale of commercial buildings, especially if the business is owned by shareholders, who are taxed at the marginal tax rate for dividends they receive.

“How do you ring-fence that income and will there be no further taxes when you pay dividends? Those kinds of mechanics of how it actually works are still not clear to me,” says Walker.

Tax specialist Russ says a shift from exempting the ‘main residence’ (BLT) to the ‘family home’ (CGT) could cause headaches.

“Whether [the family home] is the same as the main home concept as in the existing bright-line language, I don't know,” he says.

Excluding business assets from the CGT could create confusion too, because commercial property - which would be subject to the CGT - could also be classed as a business asset, Russ says.

“The devil will be in the details. This is a really fascinating area and from a slightly more senior practitioner, there’s a really interesting debate to be had.

“There are some really interesting questions about the wisdom of this initiative at this time, for this economy which is a pretty delicate flower at the moment.”

Revenue

The proceeds from the BLT go into the general pool of Crown income, which is used to pay for a vast array of things. How much? The IRD hasn’t been keeping a record.

But Labour’s CGT wouldn’t go into the Crown’s general pot of money. It would be ring-fenced to pay for the party’s ‘Medicard’ policy, which would give every Kiwi three free GP visits a year.

The CGT would bring in around $700m a year, which Labour says would be more than the BLT, even though the CGT would be a lower rate.

Conclusion: so what’s the difference?

Apparently, not that much. The differences are:

– The timeframe: two years (BLT) vs no timeframe (CGT);

– The tax rate: the top marginal tax rate (BLT) vs 28% (CGT);

– The type of property: only residential (BLT) vs residential and commercial (CGT);

– The use of the revenue: not ring-fenced (BLT) vs funding a specific policy (CGT).

In conclusion, they are very similar concepts that do very similar things.