The only change to the tax system the Government’s considering making to improve housing affordability is one it believes is unfeasible to implement in the short term.
The Tax Working Group (TWG) in February recommended the Productivity Commission investigates a tax on vacant residential land as a part of its inquiry into local government financing.
Finance Minister Grant Robertson liked the idea. It was one of only 10 TWG recommendations he in April classified as a “high priority". (The TWG made a total of 99 recommendations, including one to extend the taxation of capital gains, which the Government wrote off).
However the Government, in its 2019/20 tax working programme published last week, said: “It is unlikely that any significant reforms relating to vacant land and property would be feasible in the short term.”
While the relatively brief document didn't elaborate on why, Robertson told interest.co.nz it would take some time to get the design of such a tax right.
Furthermore, he said: "There's a long lead time with tax legislation. We're certainly doing the work now and if that comes through in a way that's positive, we'd be looking to move on it. But there's obviously a legislative timeframe that would be associated with it."
Robertson ideally wanted to see a bill introduced to Parliament before the 2020 election, but said it was a matter of looking at "what's possible".
Put to him that it didn't seem like the Government was moving with particular urgency, Robertson said: "I'm still very interested in it."
IRD and Treasury hesitant
The Productivity Commission, in its draft report on local government financing released in July, said it was seeking advice on a vacant land tax and would report back to the Government by November 30 when its final report was due.
It noted such a tax could incentivise the productive use of land and discourage land banking. On the flipside, it could be hard to define vacant land and therefore the rule could be easily avoided. It didn’t elaborate on the matter.
Meanwhile, both Treasury and the IRD in November 2018 advised the TWG against recommending a vacant land tax be introduced.
They argued there wasn’t enough evidence to suggest such a tax would have the desired effect.
They said the design and implementation would be complex and believed it would be difficult to make a judgement call to determine whether one type of land use should be preferred over another.
They conceded a vacant land tax could be administered by local authorities provided they had invested in rezoning the land and providing infrastructure.
“If there has been no investment, then the ability to impose a targeted rate seems less certain,” Treasury and the IRD said.
Using tax to encourage seismic strengthening on the agenda
The tax working programme also said the Government was considering improving the integrity of existing rules, considering ways of encouraging property owners to carry out seismic strengthening, and reviewing the scope of the bright-line test and the ring-fencing of rental losses.
Here’s a copy of the “land section” of the programme in full:
The current land rules will be reviewed, particularly in relation to investment property and speculators, land banking, and vacant land. The objective would be to recommend ways to improve the efficient use of land, and ensure that the current tax settings are fair, balanced, and encourages and supports productive investment. The review will also look at whether we can do anything more around enforcement of the current rules. It is unlikely that any significant reforms relating to vacant land and property would be feasible in the short term. However, in the short-term the Government could consider a number of measures aimed at improving the fairness and balance of the tax rules for land.
Possible items that could be included in a short-term package
Measures to support efficient land use:
• clarifying and tightening the rules for the deductibility of holding costs (e.g. rates and insurance) for land that is taxable on sale; and
• consider ways to encourage seismic strengthening of residential property.
Measures to improve the integrity of the rules:
• review the exemptions in the land rules, in particular the exceptions for developers and habitual renovators; and
• review whether the apportionment rules for GST are working appropriately for mixed use land.
Measures to improve collection:
• consider whether applying withholding tax on transactions involving New Zealand resident vendors is a better approach to collecting this revenue; and
• improving information flows (including from LINZ) to assist compliance with the current land tax rules.
Possible items that could be considered in a longer-run review
• the Productivity Commission’s advice on the use of vacant land and property taxes to discourage land banking;
• review whether the land rules, in particular the “10-year” rules, negatively impact the supply of land or create inefficient “lock-in effects”;
• consider whether other tax measures could reduce speculation and improve the supply of land. This could include reviewing the scope of existing rules such as the bright-line test and ring-fencing, as well as looking at potential new taxes to help improve the supply of available housing;
• consider whether withholding taxes might be appropriate for other taxable land transactions;
• consider whether allowing losses on building disposals might improve the fairness and efficiency of the current land tax rules. This option may remove a potential distortion discouraging transactions that may result in capital losses – for example, the acquisition of earthquake prone buildings; and
• review the provisional tax rules in light of bright-line income from land sales.
64 Comments
After the CGT debacle can you blame him for being hesitant. No. The aspect he clarified for me is that the vacant land tax will only apply where council has already installed infrastructure. No infrastructure no tax. That would rule out alot of larger properties and seems fairish. I also like that they will review the 10 year rules. Do an amnesty and allow land and multiunit properties to be subdivided with no tax effect. There are literally thousands of units and houses locked in to being rentals as a result of being single (freehold) title with the house(s) next door.
The tax is an incentive to develop the land. The infrastructure costs tens or hundreds of millions of dollars to deliver and can't be built without central and/or local government coming to the table. Eg. Healthy Waters needs to agree to build additional processing capacity in its network and use it's requiring authority powers under the RMA to deliver reticulation. It wouldn't be fair to tax a landowner to incentvise them deliver something that they can't deliver.
Certain RMA tree protection rules only apply to "urban" areas, and whether an area is "urban" depends on whether it is serviced. I don't support a vacant land tax at all, but they could just apply it to "urban" areas as already defined.
I am only referring to those sitting on land bordering the urban limits with no genuine intention of making a living out of it, and are merely awaiting the urban boundaries to expand and for their land to be exorbitantly profitably re-zoned for urban development: it is this category that are known as 'Land Bankers'.
I know of one case on the eastern Manukau boundary where new immigrants with no knowledge of NZ agriculture just sit on the land and lease it out. I know of two cases on the west Auckland boundary where retired baby boomers (my age group) have large land-holdings and don't have any intention of properly farming the land; one, already very wealthy, tried to tell me he intended to start a truffle farm some years ago but nothing ever eventuated.
Have to agree on the lack of performance.
You could also add lack of delivery on their promises of slashing planning rules, the RUB etc.
Also Twyford's tram dreams seem to have broken down
Where's the Green Investment Fund at?
Pretty poor overall, although I still don't regret voting for them
At least their intent is right, and they have got a few good things done (FBB, extension of BLT, rental insulation requirements...)
I'm really not that convinced on land tax. I think it's full of potential unintended consequences.
Also, the tax would need to be quite a punitive one to have any real impact. Maybe that's not a problem.
It's skirting around the real issue, which is that there is market failure and that the government simply needs to build a lot more housing.
... the theory behind it is that owners of land make capital gains on it without any productive input... over time the land will increase in value . .
Therefore a small annual tax ( 0.5 % , say ) can be levied against landowners ... all landowners . . to offset against tax on wages and business ...
... land tax is simple to implement , impossible to avoid , cheap to administer, and raises consistent supplies of revenue for the government ...
The people most in favour of raising the entitlement age of super are those aged 70 to 75. Those most in favour of raising the top income tax rates are on low income. And those people who wish to see landowners hit with a "punitive" land tax ..... (fill in the blank)
The land tax encourages productive use of the land . .
. unlike the dreaded CGT which discourages productive endeavour ... land tax is levied only on the unimproved value of the land , not on the structures , buildings or business being constructed or operated atop that asset ...
A land tax (as opposed a vacant land tax) is one of those things that sounds good in theory, but in the real world will yield nothing but unintended consequences.
The profit motive already encourages productive use of land. If you want to discourage investment in residential construction and provision of rentals, a broad-based land tax is a great way to do it.
Those looking to invest don't care if a $10k tax (for example) is based on the value of the land, the area of air space, the soil type, the area code or the value of improvements - a $10k tax is a $10k tax. It will simply shift the supply curve of rental accommodation and new builds to the left and increase price. Very difficult to argue that a $10k land tax on a rental property will encourage more productive use of the land, but a $10k tax on that same property based instead on the value of the house will have a different effect.
The theory of a land tax improving productive use of land falls over when you realise that a larger tax can't possibly result in more efficient use of the land. If a 3% land tax will make land use more efficient then logically a 100% land tax would encourage super efficient land use. But we know intuitively that a 100% land tax would just discouge acquisition and development of land, resulting in massive housing shortages.
We'll never tax our way out of the housing shortage.
Apart from the assumption that the profit motive results in productive use of land. That could be satire, but I think the commenter genuinely believes the profit incentive is some panacea.
The profit incentive doesn't necessarily improve productivity, and suggesting it does really is a ridiculous claim considering all the land banking going on in the hopes of rezoning, and rental property not being sold to owner-occupiers.
The profit motive is contributing to many other deleterious market externalities besides the obvious shared resource constraints.
Important to note I was talking about a land tax, not a vacant land tax. The profit motive is primary reason that land is subdivided and developed.
The IRD and Treasury, in their report prepared for the TWG, concluded there wasn’t enough evidence to suggest a vacant property and/or land tax would have the desired effect of increasing housing supply to improve affordability.
I agree with the Productivity Commission when they say that land banking is only possible because local regulations and investment decisions restrict the supply of land for housing. Land banking is a symptom, rather than a primary cause, of land supply shortages.
You should read section 9.5
https://www.productivity.govt.nz/sites/default/files/using-land-draft-r…
I disagree with much of what they have to say, but this section is good in my opinion.
Yes, there seems to be a lack of understanding that adding costs generally increases the price of something. Whether you call the tax an incentive or a penalty, it is still an added cost that does not add any value.
If you want to make something cheaper, remove non-value added costs, ie waste in the system. The biggest incentive you can give landbankers to develop or sell to someone that will, is to take away their monopoly status, ie remove zoning restrictions.
This council needing to supply infrastructure is a red herring that will allow councils to limit the supply of land due to their inability to fund, and reluctance to develop even if they could due to their 'smart city', high density will save the planet ideology.
All that is going to happen is control will move even more to council, as will the revenue to them in the form of more cost to us.
The issue has never been about building affordable housing, it as been about the power struggle of over who controls the monopoly of when land gets developed. Up until recently it has been the land bankers that have generally controlled land release and have captured most of the value capture/profit windfall. Council now want that rentier profit.
Sorry Ocelot reducing a yield increase an asset's value. Example, an asset earn 100k pa, if it has a yield of 10% the asset is worth $1 Mill (100k/10%) if the yield reduces to say 8% the asset's value increases to $1.25 Mill (100k/8%)
(many people don't understand yield properly)
That's not what a land tax does Yvil. It reduces the yield through decreasing what that asset earns. It's an expense remember. So let's say that property now has a $20k land tax bill. That leaves $80k income. 80k / 1 mill is now 8% and if the investment environment expects the 10% return that it was before that means it's now only worth $800k.
Yvil is correct both on a general level, and specifically as he is replying to your comment where you say 'reduce the yield', but as you say if you keep the yield the same when you increase cost, then you reduce the value/price.
It is not the yield you are reducing, you are increasing the costs.
The size of the yield normally is indicative of the risk involved, but what confuses the issue relative to residential property is that it works on Gross yield not Net like commercial.
... yes ... unless it is very well marketed to the electorate that the monies from land tax would be offset against income taxes , and company taxes ...
Land tax would affect the rich more than it does the poor. . . GST does the opposite ... but no one is up in arms against GST ...
I have my doubts that someone so skilled at marketing exists on planet Earth. Would be like telling people that council rates are going to quadruple as part of a convoluted plan to encourage more productive use of land. And when told that it's all going to be OK because income taxes will be reduced to offset it, the smart voters will tell your marketer to shove it because they won't be earning an income when they retire and don't want to be forced to take out a reverse mortgage later in life just to be able to afford to pay for the privelage of living in their own home.
The vacant residential land tax was the best idea out of the TWG recommendations. But here we have it - the stupidity that comes with short terms. The government will limit anything it introduces 6 months to a year before an election, basically in case it gets something slightly wrong as it will get punished for tiny mistakes in an election year.
This is why we have caretaker governments who don't want to change anything. By the time they got around to making a decent change they campaigned on, it would be in an election year, where they won't want to screw anything up. But large changes that are good for the country take YEARs past implementation before the benefits are seen. There are very little short term changes you can make that have a huge effect.
At the moment when the governments change you have 6 months to a year of settling in, 1.5 years of making and implementing policy, 6 months to a year of preparing and running for elections. This makes government almost completely ineffective.
We need 4 year terms at least, but I suggest 5 year terms. It would have a whole lot of effects:
More long term thinking from the government.
More time to actually implement the policy they campaigned on and see the results.
More boldness, which is what will cause real change.
Less cost in running elections over the years.
Possibly more voter turnout.
"But what about them abusing their power etc??" I hear people say when I suggest this. We have strong institutions for managing this and a vote of no confidence or defection of MPs from parties can cause governments to change without elections. As far as I can see, with current systems, we can handle MPs abusing their power or the implementation of horrific policy.
Not necessarily. We have 3 year terms and 3 term governments at the moment. If you think about it, at least one of those elections from the last 2 Labour/National governments have been pointless.
A 4 year term may mean they only get 2 terms in power - 8 years instead of 9 before voters swing the other way.
Every year you add to a governments term is another step towards dictatorial style governance. Three years is best.
It's bad enough that voter mentality effectively gives us nine year terms already, longer terms are a terrible idea. Dangerously stupid even, up there with the attempt at regression backwards from MMP like we saw under National, towards less democratic election systems with /much/ poorer scores on the Gallagher index.
Why do you seem to think that governments would still win 3 elections with longer terms? It is likely they would only win 2 instead. As replied to Housework, we have a basically pointless election in the last 2 governments returning almost exactly the same government to power with near enough the same majority. I expect the next one to be the same.
You also haven't explained why 3 year terms are best in term of policy implementation, I suspect because you know it's poor.
So called housing shortage, when migration is actually overstated..
https://www.stats.govt.nz/news/net-migration-remains-around-50000
Over a 3 year period, migration into Auckland was overstated by 16k
Anything to do with property more or less puts you head on with the born to rule types that find it intolerable that they should be bound by the same laws and regs of society as the rest of us. Having that sort of aggressive natured opposition to your legislative agenda would be like sitting in a mini with a grumpy gorrilla and a pissed off bag of snakes!
Too easy to avoid. Would end up with large numbers of professional house-sitters, not fixing the problem. ~1% land tax is better to encourage productive use of land, particularly get expensive urban houses occupied by economically active people and so reduce the number of people commuting from urban boundaries with the high demand that places on road infrastructure.
Labour increased their party vote with the stance of being a transformational party. There are two problems with that:
1, they never received a mandate from the public to transform anything... National nearly received half of the party vote (44.5%) whereas Labour only received 36.9%. They simply have no mandate to drive change, their polling knows that and Winston knows that. Why do you think he is positioning himself as the CoL handbrake?
2, they were never prepared to govern or to actually enact change. They talked a good game in 2017 but when they bought the election (by giving NZ First and Shane Jones $3bn) they had no idea what to do. Every one of the flagship policies has either failed or never got out of the talkfest/workforce stage.
They have been found wanting at every turn. There are only two ministers I would trust to water my plants let alone run the country (Parker and Faafoi). The sooner the election rolls around and we can elect some grown ups the better cos frankly this bunch is embarrassing.
Okay, okay dude we get it you're still upset that National lost the election. The bigger picture is, New Zealand politicians in general lie their way into power. National too was great at talking back in 2008 when I voted for them. They promised not to increase GST, promised to close the Wage Gap with Australia, promised not to sell assets, and look what happened.
The sooner the election rolls around the sooner we'll realize there's still nobody worth voting for, they're all crooks.
There is no debate that National had their issues and were a tired looking mob by 2017... my point is I don't think there was a commanding voice from the electorate for a transformational change that the Labour party has been trying to pursue. Moreover, as has become apparent, they have no idea what change they want to implement or how they can implement it.
What if anything are they achieving to address the housing shortage? Lots of hot air, but not enough to keep the homeless people warm. Apart from State houses, I think that they have achieved even less than the cynical, dishonest National party. They are not much more than a shadow of National.
Jeez , this Government some some really dumb things . A tax on unused vacant land held for speculative purposes would have 2 immediate effects
1) It would stop Land -banking in its tracks
2) would encourage holders of unused land to either develop it or sell it for development
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