Landlords are likely to be hit with some kind of capital gains tax in future - but New Zealanders should not expect house prices to drop by much.

Photo: RNZ / Richard Tindiller

The interim report from the government's Tax Working Group (GTWG) - released yesterday - has signalled taxation on capital income is likely in its final report in February.

The report proposed two options for taxing capital gain: Any gain from the sale of assets taxed at roughly the marginal income tax rate; and taxing a portion of the value of certain assets each year.

According to Treasury, 82 percent of assets potentially affected were held by top 20 percent wealthiest households.

Minister of Finance Grant Robertson said today he was not ruling out a capital gains tax, but was not ruling it in either.

Mr Robertson told Morning Report he won't be making a decision until the working group had delivered its final report, but said it was clear that the current system could be improved.

"We wouldn't have set the group up if we thought the tax system today in New Zealand was perfect. But I'm not saying that we are going to adopt any particular model. We asked the group to go away and think about how they could establish a more balanced tax system and one that addresses issues like inequality.

"It's important we keep that discussion going so that we can move to having a more balanced and a tax system where people pay their fair share," said Mr Robertson.

He would not say if he favoured a capital gains tax but said the tax system could be fairer and better balanced.

"The group [Tax Working Group] have said that New Zealand's tax system compared to the rest of the world doesn't reduce income inequality as well as it might," he said.

"Making sure that we tax all sources of income certainly would [help reduce inequality] because what we know is that the holders of assets are not in all cases being taxed at the moment."

He said New Zealanders wanted to see people paying their fair share.

"We don't like it when multi-nationals rip us off in the tax system. People want to know that when they go to work and they pay tax that others will be treated similarly."

Chapman Tripp tax lawyer David Patterson was sceptical the government could raise $6 billion dollars through a capital gains tax. He told Morning Report the estimate was not credible.

"They are proposing to protect values at the date of enactments, we are currently at world-record high prices, because we have world-record low interest rates and at some point, that worm will turn," he said.

In addition, Mr Patterson said the report assumed taxing 3 per cent a year, but it could take 30 years before some realise a business out of a trust, which would bring into question when the government imposes the tax.

The government said despite the extra revenue, the tax would be fiscally neutral.

Independent economist Shamubeel Eaqub said the extra money could be used to fix policies in the tax system.

"We still charge a tax on very low levels of income, in comparison to Australia there is no tax on income.

"Also, I'd like to see a big ramp up of R&D tax credits, but also to bring back depreciation on buildings, I think that's had a big impact in terms of delaying repairs of buildings both in rental properties and commercial properties," he said.

What would a capital gains tax mean for house prices?

The report found the main reason for skyrocketing property prices was the chronic housing shortage - but tax-free capital gains had exacerbated the problem.

GTWG was of the view the impact on housing of a capital gains tax was unlikely to be large, although they expected rents to rise over time and house prices to level off.

Property analytics company CoreLogic head of research Nick Goodall said the fact there would not be the same benefits in housing meant it would be less attractive as an investment.

"So there won't be the same demand and theoretically house prices won't rise at the same rate, I think that's fair enough to assume that is true."

GTWG ruled out a wealth tax (such as a land tax, estate duty or gift tax) as too complicated and open to tax avoidance with the extremely wealthy likely to sink their money into untaxed assets or even emigrate to avoid it.

That disappointed Council of Trade Unions secretary Sam Huggard - but he was pleased capital gains was on the table.

"It's a really obvious solution to a number of issues, not just in terms of housing but also in terms of fairness, really, so that workers, factory workers, cleaners and nurses are being taxed on their income, but those who have multiple properties aren't being taxed on their income off those."

Proposals for new environmental taxes - such a waste levy or congestion charges - needed to be carefully balanced with extra support for struggling families so they were not penalised further, he said.

GTWG will not recommend a reduction in the goods and services tax (GST).

Building Financial Capability Trust head Tim Barnett said budgeting services dealt with the human impact of rising inequality - with about 60,000 clients a year.

"If we accept the reality of GST as it is, there have to be other measures taken to compensate for that impact."

A capital gains tax could be one way of getting more money into the system to support those on low incomes, he said.

Victoria University Institute for Governance and Policy director Simon Chapple said the report ignored the role taxation played in stabilising the economy.

If people lose their jobs, the reduction in income is cushioned by the fact they are taxed less and the welfare system acts as a safety net.

Successive governments had undermined stabilisers by flattening the income tax scale and allowing benefits to slip 25 to 30 percent behind wage rises since the early 90s, he said.

"It's highly likely in the next two or three years we're going to go into a recession with much weaker tax and benefit stabilisers than we've traditionally had, and it would have been great if they had paid some attention to that."

The government should have had an integrated review into tax and welfare, he said

Finance Minister Grant Robertson said the government would not make any decisions until it received the final report in February.