It has vowed to "go again" in the battle to get more families in the district into affordable houses.
The variation would have required most new residential subdivisions and developments to make contributions of either land or money to the Queenstown Lakes District Council.
That, in turn, would have been used by a registered community housing provider — for example, the Queenstown Lakes Community Housing Trust — to develop housing to help low to moderate-income earners.
The trust has a waiting list of about 1300 families.
The panel of Jan Caunter (chairwoman), Jane Taylor, Ken Fletcher and Dr Lee Beattie had a week-long hearing into the variation. They had recommended withdrawing the variation, saying it was better to have a mix of regulatory and non-regulatory options, preferring a package of targeted measures over the variation alone to increase affordable housing provision in the district.
Withdrawing the variation means the council will not be able to request contributions to the trust, but it can continue to negotiate individual developer agreements on a case-by-case basis.
The proposed variation was a first for the country.
Queenstown Mayor Glyn Lewers acknowledged he was frustrated but supported withdrawing the variation.
He wanted to take a "glass half-full" stance and "go again".
"In my position you always have to look on the bright side. The bright side for me was the panel found the variation lawful and the case was valid. That is a very important start for the case for whatever happens next ... [We have] a very good base to start again on an issue of high importance to the district," Mr Lewers said.
Deputy mayor Quentin Smith, from the Wānaka-Upper Clutha ward, said affordable housing was one of district’s greatest challenges.
He felt the commissioners’ recommendation removed any leverage the council had been working to get to aid affordability and support the not-for-profit trust, Cr Smith said.
The variation had been a strategic approach to addressing one of the greatest issues people always talked about: "will our kids have jobs; can they afford to be here?"
"We have been left on the back foot. We don’t have any leverage now ... I am really uncomfortable with this recommendation because I believe it was outside the delegation of the panel that made it."
Cr Lisa Guy, who represents the Arrowtown-Kawarau ward, apologised to council planning staff, the trust and families looking for an affordable house.
"To the team that gave this a shot, thank you. It was an out-there call and an election issue for many of us.
"I want the housing trust to feel heard today and I respect ... how disappointing this is for all of them ," Cr Guy said.
Cr Cody Tucker, of the Wānaka-Upper Clutha ward, said he had many friends looking for homes.
Despite the disappointment, he was proud the council was tackling affordable housing.
"Failing is trying and trying is awesome . . . [let’s] bring the community with us ... We can try to figure it out . . . I am proud we are constantly fighting the good fight," Cr Tucker said.
Cr Barry Bruce, of Wānaka-Upper Clutha, said he supported withdrawing the variation because "such a charge will inevitably be passed on by the developer and make it akin to a Robin the Hood tax, neighbours subsidising neighbours. I don’t think that is fair or equitable."
Council chief executive Mike Theelen said it was not correct to describe the contribution as a "tax", because the contributions were not held by the council and were all passed on to the trust.
