Have your say: Property Council warns tax reform would hit competitiveness

The Property Council of New Zealand (PCNZ), which represents commercial property investors, has warned that property tax reforms that could be unveiled by Prime Minister John Key at 2pm this afternoon could cut New Zealand's competitiveness. I am in Wellington and will be liveblogging the Prime Minister's speech from Parliament from 2pm. Property Council President Chris Gudgeon said more than 80% of commercial property was owned directly by businesses and an "ill-considered application" of tax changes would increase the cost of doing business in New Zealand. Here's Gudgeon's full comments below:

"PCNZ would be hugely concerned if the Tax Working Group's recommendations for tax reform to deal with concerns in the residential property sector are extended to include commercial property owned or rented by businesses," Says Mr Gudgeon. Mr Gudgeon and Property Council CEO Connal Townsend highlighted the findings of two independent reports by NZIER and KPMG into the recently announced Tax Working Group (TWG) proposals. The reports, commissioned by Property Council, found that proposals based on changing depreciation rates and applying land taxes are the equivalent to raising taxes on the productive sector, with potentially significant effects on growth and economic performance by adding more damaging costs to doing business in New Zealand. "While the Property Council supports the Tax Working Group's (TWG) call to reform the tax system to deliver revenue to government that won't damage growth prospects and is fair and sustainable, we don't think enough work has been carried out the current proposals for them to fit those criteria," says Mr Townsend. "Commercial property is the infrastructure of business and is fundamental to productivity, international competitiveness and growth. But more than 80% of commercial property is owned or occupied directly by business owners and the proposals around depreciation would be the equivalent of an effective rise in tax from 30% to 32%. "That's at a time when at a time when government and the TWG have rightly identified that New Zealand needs to be reducing corporate tax rates to remain internationally competitive. "The equivalent of a tax increase will also have an impact on our capital markets and our ability to attract and retain international capital. Further damage to the capital markets will be caused if tax rates for PIE's and widely held superannuation funds, including Kiwisaver schemes, are increased above the current maximum of 30%". "About 1.3 million New Zealanders have already invested in Kiwisaver and almost all of that investment is in PIE funds. Increasing investors' tax rates runs contrary to the objective of encouraging long term savings in the New Zealand sharemarket and providing for retirement. Mr Townsend said the independent analyses by economic consultancy NZIER and tax experts KPMG show New Zealand businesses will bear the brunt of the costs from TWG proposals to reduce depreciation and impose a land tax. "Unfortunately both proposals just become another impost on business in New Zealand. Every warehouse or factory owner, dairy farmer and wine producer faces an additional cost in producing export earnings for New Zealand. "The TWG expects to raise around $1.3 billion from its depreciation proposals and the analysis shows about $1 billion of that will come from the commercial sector. We have major concerns about that additional cost to business but also in the model itself. Based on our collective industry knowledge, we believe there may be as little as a quarter of that figure available in potential revenue to the IRD depending on the figures used by the TWG. Clearly the numbers need further work." While supportive of carefully considered reform that would be less damaging to the country's growth prospects Mr Townsend said Property Council could not support proposals that would make New Zealand an outlier among OECD tax regimes and damage international competitiveness. "KPMG's survey of international research concludes that building structures, specifically commercial and industrial buildings, do depreciate and the same conclusion was reached by the Inland Revenue Department in a 2004 study. "KPMG's analysis of the tax treatment of building depreciation in a global context indicates that New Zealand's current rules on building depreciation are the norm. The majority of our trading partners including Australia, Germany, Japan and the United States allow depreciation on non-residential buildings. Denying depreciation would impose an additional cost on NZ business making us less competitive and less attractive, particularly against our closest competitor Australia. Why would we introduce a policy that would reduce New Zealand's international competitiveness?" says Mr Townsend. Mr Townsend said Land Taxes could be efficient at raising tax revenue but added New Zealand's history with land taxes was poor. "To work they must be applied across the board but we had so many exemptions in the past that land taxes became ineffectual and were abolished in 1991. By that stage farms, recreational land, church and charitable groups were exempt and the burden fell on business. We would expect the same to happen again. "Land taxes are basically the same as local government rates. The Independent Inquiry into Local Government Rates has already found that rates are unreasonable on business and here's a proposal to add further rating costs to business. That makes no sense."

My View We'll all know exactly what John Key is proposing from 2pm today, but my understanding is that Key is unlikely to opt for a land tax, an increase in GST or a Capital Gains Tax. He is more likely to opt for a change to the rules around claiming depreciation on buildings, which would raise NZ$1.3 billion to help pay for a cut in the top personal income tax rate to match the trust rate at 33%. The Property Council does have a point that most of this impost from removing depreciation on buildings as a taxable expense would hit commercial rather than residential properties. That's why I think a land tax is a cleaner more efficient way to tax residential property investors, who are the ones who make losses in 2008 of NZ$2 billion on assets of NZ$213 billion, reducing tax revenues by NZ$150 million to NZ$200 million. But it appears at this stage that the government will not take on property investors with a land tax. That's at a pity and would be a sign of leadership failure, if confirmed.