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Press Release

Budget 2016: increase housing supply, not taxes

13 May 2016 6 min read

There is a children’s riddle that asks “what goes up but never comes down?” The answer is “your age”.  These days Auckland property prices could also be an acceptable answer.

Various strategies have been devised and implemented in an attempt to control the market, including both non-tax measures (freeing up KiwiSaver funds, banking restrictions), and tax measures (the so-called “bright-line” test). In terms of the latter, reintroducing land tax has come to the fore of the debate.

Those of us who see the opening riddle as a harbinger of our mortality may recall when we last had a land tax in New Zealand. First introduced by Governor Grey in the 1870s to help fund significant capital works at the time, land tax was finally abolished in 1992.

Towards the end of its life it was a charge of 2 percent per annum on the rating valuation of land. From 1989 it was progressively reduced to nil. It was far from universal in its application, with several exempt classes of land, including farming land, sports clubs, local authorities, charities, customary Maori land, hotels, aged people’s homes and hospitals, historic places and, significantly, residential land up to 4,500m2 in area.

In addition, at the time of its demise, there was a $175,000 exemption. Applying the Reserve Bank’s housing price index to that 1992 amount gives a present date value of just over $776,000.

Also of historical note was the presence of a 50 percent surcharge on land tax charged to “absentees”. This was defined as a person not physically present in New Zealand for at least half of the previous four years.

A land tax targeted at only non-residents is likely to miss the mark, with recent information from Land Information New Zealand (made possible by the increased level of reporting from the bright-line test) indicating that only 3 percent of property transfers in the first quarter of this year involved overseas tax resident buyers. Only a third of them were based in Asia.

The reintroduction of a land tax was considered by the 2010 report of the Victoria University Tax Working Group, “A Tax System for New Zealand’s Future”. The report held to the Government’s underlying principle of a broad-based low-rate tax system, and ultimately in an increase to the GST rate and a decrease in basic income tax rates. 

The group felt that land tax was efficient due to the fixed supply nature of land, amenable to a low rate due to the size of the land base (at that time its estimated value was around $480 billion) and administratively straight forward. However, the group also saw downsides. The report noted that land tax would impose a lump sum tax on land owners at the date of introduction based on the present value of future land tax obligations, possibly resulting in negative equity for highly geared properties, as well as resulting in increased costs being passed on to tenants of rented properties. It was felt that the imposition of such a tax could particularly affect certain people, such as farmers, retirees and Maori authorities – unless of course a simple system became hamstrung with numerous exceptions. 

A land tax also creates cash flow issues because land does not necessarily generate cash.

Introducing a land tax is a knee-jerk reaction that will do little to solve the problem at hand, while creating a myriad of new issues to contemplate – much to the delight of tax practitioners who may be looking for something to do that is perceived as more socially acceptable than managing foreign trusts. As Reserve Bank Governor Graeme Wheeler has made clear, the key to the housing price problem is to increase supply.

Further enquiries, please contact:

Geordie Hooft
Partner, Tax and Privately Held Business
Grant Thornton New Zealand
T +64 (0)3 964 6828
E geordie.hooft@nz.gt.com

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