Deloitte partner Mike Shaw on Land Tax option


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  • Non distortionary, subject to land owners wanting a low value and potentially will defer development especially if a low value exemption applies Efficient to collect if it is simple to administer, will be more difficult if exemptions/relief provided Land values to drop will depend on the rate imposed, 1% tax expected to drop between 16-25% Re wealth tax, obviously only hits those with land, other areas of un taxed capital are not taxed, e.g. overseas land, art, expensive boats, gold, jewellery etc, or as one official said why not all those with blue eyes!
  • Like GST, one school of thought is that all land would be caught and no exemptions given
  • Not sure this addresses the perceived or real tax advantages obtained by residential landlords; basically post the initial one off reduction in land values, all other cashflows will remain the same, i.e. lower purchase price going forward offset with higher rates bill!
  • Note if tax deductible the net revenue gain will be $3.12B assume all taxpayers pay at 30%, does not take into effect tax losses, different margin tax rates, tax exempt entities (charitable landlords) etc.
  • I am not qualified to comment how valuations are determined other than when I look at my land holdings, at times they are a complete mystery to me Land values based on alternative use, sheep and beef farm which is convertible into dairy, golf courses valued based on land that can be developed into residential sections etc. Not that I understand all the different classifications, Councils (and private land owners?), to avoid/reduce land tax, may want to classify land in low value uses, albeit I suspect there is a risk whether the land can be converted back into a high value use.
  • I am not qualified to comment what will happen, just another impact that needs to be considered
  • Should we have an exemption, compare 2 people owning $500k of land, one being a section in Khandallah and one 10 minutes away as a life style block which is below the threshold!
  • Already discussed, would have been interesting if this was introduced just before the credit crisis ands whether the fall of the finance companies would have been more dramatic
  • Land value reduction may open up new land for houses as people look to realise value to reduce cash cost of land holdings
  • Not sure whether gross or net leases will result in a difference, even net leases which allow landlords to pass the cost on to tenants will be self corrected when the lease is reviewed as most lease reviews are based on gross lease returns
  • Deloitte partner Mike Shaw on Land Tax option

    1. 1. A TAX SYSTEM FOR NEW ZEALAND'S FUTURE 1 December 2009 Afternoon Session 1 Base broadening – land taxes Discussant: Mike Shaw, Partner, Deloitte
    2. 2. <ul><li>Non-distortionary, does not impact on land supply (?) </li></ul><ul><li>Efficient to collect </li></ul><ul><li>Non discriminatory (for land owners) </li></ul><ul><li>Low rate tax </li></ul><ul><li>BUT </li></ul><ul><li>Wealth tax on all existing land owners </li></ul><ul><li>Land values expected to drop </li></ul><ul><li>Distortionary to land assets </li></ul>Background
    3. 3. <ul><li>Who would be impacted by a land tax? </li></ul><ul><li>All land-holders in New Zealand, regardless of status: </li></ul><ul><li>Non-residents with New Zealand land </li></ul><ul><ul><li>Foreign Governments’ land holdings? </li></ul></ul><ul><li>Charities </li></ul><ul><ul><li>Land held for charitable purposes </li></ul></ul><ul><ul><li>Land held for commercial purposes </li></ul></ul><ul><li>Local authority land holdings </li></ul><ul><ul><li>Reserves/parks etc (likely to be excluded?) </li></ul></ul><ul><ul><li>Commercial land (included) </li></ul></ul><ul><li>Non-state schools, private hospitals </li></ul><ul><li>Other </li></ul><ul><ul><ul><ul><ul><li>` </li></ul></ul></ul></ul></ul>Background continued
    4. 4. General Issues for consideration <ul><li>Will not address residential rental tax advantages </li></ul><ul><ul><li>No direct impact (consider acquisitions post land tax) </li></ul></ul><ul><li>Would not impact land holdings offshore (e.g. a holiday home in Coromandel would be impacted, but not one on the Gold Coast) </li></ul><ul><li>Based on individual titles versus taxpayers total land holdings (relevant if a value exemption) </li></ul><ul><li>Deductibility of land tax - i t is cost of owning land, compare to: </li></ul><ul><ul><li>Rates </li></ul></ul><ul><ul><li>GST on revenue expenses by non-registered persons </li></ul></ul><ul><ul><li>Not a tax on income </li></ul></ul>
    5. 5. Revenue costing <ul><li>A land tax could raise as much as $3.8 billion , according to figures provided by a paper commissioned by officials (net fiscal will reduce if tax deductible) </li></ul><ul><li>This figure is based on a land tax of 1% and assumes a land value reduction of 16.7% - 25%. If a 0.5% land tax was imposed, the assumed reduction is 10%-15%. </li></ul><ul><li>This revenue would come from the following areas (assuming a 1% land tax): </li></ul><ul><ul><li>Owner occupier $1,560m </li></ul></ul><ul><ul><li>Residential rental $916m </li></ul></ul><ul><ul><li>Commercial forestry $36m </li></ul></ul><ul><ul><li>Agriculture $875m </li></ul></ul><ul><ul><li>Industrial/commercial/mining $446m </li></ul></ul>
    6. 6. Specific issues for consideration <ul><li>Valuation </li></ul><ul><li>Disputes about the accuracy of valuations – especially commercial land values </li></ul><ul><li>Different valuation periods by different councils </li></ul><ul><li>Disputes about the value of land versus improvement values </li></ul><ul><li>Land values may be based on alternative use rather than actual use – equitable? </li></ul><ul><ul><li>Sheep and beef farm convertible to dairy </li></ul></ul><ul><ul><li>Golf courses </li></ul></ul><ul><li>Councils will re-zone/reclassify land holdings to reduce value </li></ul>
    7. 7. Specific issues for consideration (cont) <ul><li>Impact on retired citizens: </li></ul><ul><li>Low income, but some hold land with high value </li></ul><ul><li>Could defer until sale/death plus interest charge </li></ul><ul><ul><li>Highlights wealth tax aspects, potentially an estate duty? </li></ul></ul><ul><ul><li>Most estates that seek deferral will have major liabilities for land tax, especially as retired people live longer </li></ul></ul><ul><ul><li>Lock in impacts for those in deferred payment scheme (roll-over relief)? </li></ul></ul><ul><li>Could adjust National Super, but how much? </li></ul><ul><li>Could have specific rebates, but will add costs and reduce efficiency </li></ul>
    8. 8. Specific issues for consideration (cont) <ul><li>Impact on individuals </li></ul><ul><li>Individuals with large mortgages </li></ul><ul><li>Impact on rent </li></ul><ul><ul><li>Given land value reduction, existing rentals may not increase as returns based on land values may not change (consider landlord who acquires land post land tax); or alternatively </li></ul></ul><ul><ul><li>Existing landlords will want to increase rents to cover additional costs </li></ul></ul>
    9. 9. Specific issues for consideration (cont) <ul><li>Impact on farmers: </li></ul><ul><li>Tax on productive sector of the economy </li></ul><ul><li>Exemption for land values below say $50k per hectare, likely to exclude most farms. </li></ul><ul><ul><li>What about horticultural industry, for example orchard on outskirts of town? </li></ul></ul><ul><li>Should exemption be provided? </li></ul><ul><ul><li>Broad base suggests no exemption </li></ul></ul><ul><ul><li>Compare residential section with lifestyle block? </li></ul></ul><ul><ul><li>Some farms/horticulture units have close proximity to residential areas and may exceed exemption level </li></ul></ul>
    10. 10. Specific issues for consideration (cont) <ul><li>Impact on farmers (cont) </li></ul><ul><li>Land tax not likely to be compensated by other tax relief </li></ul><ul><ul><li>Taxable/cash income on farm land generally low (farms are generally low yielding business) </li></ul></ul><ul><ul><li>This is especially the case when sheep and beef land is valued on the potential to convert to dairy/horticulture etc </li></ul></ul><ul><ul><li>$3m farm will have $30k in land tax (at 1%), or $15k at 0.5% (ignoring impacts on land value) </li></ul></ul><ul><ul><li>Impact on farmers with tax losses? </li></ul></ul><ul><ul><li>Impact on corporate farmers; any corporate tax reduction? </li></ul></ul><ul><ul><li>Extent of individual tax reductions? </li></ul></ul>
    11. 11. Specific issues for consideration (cont) <ul><li>Potential insolvency of land owners </li></ul><ul><li>1% land tax could reduce land values between 16-25%, and a 0.5% tax could reduce land values between 10-15% </li></ul><ul><ul><li>Existing land owners could become technically insolvent (both balance sheet and cash flow implications) </li></ul></ul><ul><ul><li>Includes all land owners, not just farmers </li></ul></ul><ul><ul><li>Will include residential/commercial land where land owner is highly geared </li></ul></ul>
    12. 12. Specific issues for consideration (cont) <ul><li>Potential insolvency of land owners (cont) </li></ul><ul><li>Land banks for future development </li></ul><ul><ul><li>Will put more pressure on property developers </li></ul></ul><ul><ul><li>Incentive to develop ASAP (note difference for existing land owners versus land acquired after land tax introduced) </li></ul></ul>
    13. 13. Specific issues for consideration (cont) <ul><li>Leases </li></ul><ul><li>Commercial land holdings </li></ul><ul><ul><li>Ability to recover through leases? </li></ul></ul><ul><ul><ul><li>Different implications depending on terms of leases? </li></ul></ul></ul><ul><ul><ul><li>Ultimately land owners suffer a value loss </li></ul></ul></ul>
    14. 14. Specific issues for consideration (cont) <ul><li>Political pressures </li></ul><ul><li>Land tax pre 1992, exemptions included </li></ul><ul><ul><li>Residential land </li></ul></ul><ul><ul><li>Farm land, horticulture land etc </li></ul></ul><ul><ul><li>Local /public authority owned land </li></ul></ul><ul><ul><li>Land owned by friendly societies/building societies/trustee banks </li></ul></ul><ul><ul><li>Show-grounds (owned by Agricultural and Pastoral societies) </li></ul></ul><ul><ul><li>Railways/Tramways </li></ul></ul><ul><ul><li>Land owned by societies incorporated under the Libraries and Mechanics Institute Act! </li></ul></ul><ul><ul><li>Libraries, museums, cemeteries, public recreation grounds, public gardens, domains or reserves </li></ul></ul><ul><ul><li>Charitable land holdings (where the land is used as a site for the charitable purpose) </li></ul></ul><ul><ul><li>Maori Customary land </li></ul></ul><ul><ul><li>Land owned by superannuation funds </li></ul></ul><ul><li>Some pressure points will arise </li></ul>