Potential for NZers to face land tax implications

Phil Stevenson.
Phil Stevenson.
New Zealanders could easily be caught out by the introduction of a land tax, Deloitte Dunedin tax partner Phil Stevenson said yesterday.

Speaking to the Otago Daily Times, Mr Stevenson said tax residency could be difficult to determine, as many factors were used to determine where someone was considered a tax resident.

There was scope for there to be significantly differing outcomes for expats, depending on minor differences in their circumstances.

‘‘Some expats could end up paying land tax on their property while overseas with others having very similar circumstances not required to pay any land tax.''

Prime Minister John Key suggested at the weekend some form of land tax may be applied to foreign investors to help cool off the New Zealand property market.

He told the New Zealand Herald any land tax could also apply to Kiwis abroad with property in New Zealand after an exemption period of perhaps three years away.

Mr Stevenson said such differences might incentivise expats to make decisions they would not otherwise make, based solely on their potential liability for a land tax.

A New Zealand citizen on their OE might avoid the purchase of land in another country or pass up otherwise sound investment opportunities for fear those additional factors would have a bearing on whether they were considered non-tax residents in New Zealand and therefore subject to a land tax on the home or rental properties they left behind in New Zealand.

‘‘We see plenty of examples of people buying property before they leave New Zealand, particularly in the Central Otago market, with the intention of staying on the New Zealand property ladder.''

They then used their property as a holiday home or investment while overseas but they intended to live in the property when they eventually returned to New Zealand, he said.

Any land tax could have significant costs for them but would have zero impact on dampening house prices in Auckland.

However, the tax would have an impact on overseas demand for New Zealand property, lowering, or slowing the increase in house prices in areas with strong overseas buyer demand.

But if the land tax applied to all land, and not just residential land, there was potential for there to be a decrease in productive investment in New Zealand, particularly where the investment involved the use or ownership of land.

Mr Stevenson warned how reduced demand in the property market would have an impact on property values that would be borne by existing land owners.

People who bought property in the ‘‘heated market'' before the introduction of a land tax could see the value of their property fall and the owners could lose equity.

The land tax would not raise a lot of money for the Government but that was not what was expected, he said. It would be regarded as an extra rates bill for property owners and a disincentive for foreign investors.

The Government was likely to announce within the next two weeks the extent of foreign ownership in New Zealand. That should also be an indicator on whether a land tax would, or should, be introduced, Mr Stevenson.

He expected the rate would need to be 5% to 10% for the tax to be effective.

A 2010 Victoria University tax working group report favoured the introduction of a broad-base low-rate land tax. The working group noted it would be relatively straight forward to implement a land tax given the availability of land values already used by local authorities for rating purposes and could raise significant revenue at a very low rate.

A broad-base land tax would have an immediate negative impact on land values and be borne by land owners at the time of introduction.

Mr Key recent comments suggested any land tax would be targeted, Mr Stevenson said.

It would only apply to land owners who were not New Zealand tax residents.

New Zealand's existing double tax agreements and free trade agreements restricted the ability of the Government to apply a targeted - or discriminatory - stamp duty or capital gains tax to target only non-residents or to simply ban overseas ownership on land, he said.

A targeted land tax was permissible under existing agreements, and the Trans Pacific Partnership trade agreement, but would need to apply based on tax residency, rather than nationality.

The one benefit Mr Stevenson could isolate was the target land tax affecting overseas demand for New Zealand property, lowering, or slowing the increase in house prices in areas with strong overseas buyer demand.

dene.mackenzie@odt.co.nz

 


Land tax

•An annual charge on the value of land paid by the landowner. The value of improvements is not normally included in a land tax.

•It is similar to rates charged by a local authority.

•It differs to a ‘‘stamp duty'' which only applies when land is sold based on a percentage of the transaction value.

•A land tax is different from a capital gains tax which applies when land is sold and the increase in value is taxed as profit.

 


 

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