Property Tax and Assessment New From Around the World- For Information Purposes Only

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1 NEW ZEALAND What s Inside September 2015 Record Auckland house price effect continues to spread New withholding tax on residential land Property rules strengthened by Taxation Bill Farm rates under the spotlight Auckland rural lifestylers face possible rates hike Transport rate to feature in Auckland Council's budget debrief RECORD AUCKLAND HOUSE PRICE EFFECT CONTINUES TO SPREAD Auckland's house prices are rising faster than at any time in a decade, and the effect is continuing to spreading across the upper North Island. Valuation agency Quotable Value (QV) says Auckland's housing inflation rate is over 20 per cent, the highest since mid Values in the city have risen 5.6 per cent in the past three months. QV National Spokesperson Andrea Rush said high net migration and lack of supply continued to drive the Auckland market. Stricter deposit rules to take effect there soon could also be driving demand, she said. Values are also accelerating quickly in Hamilton, and are rising in Tauranga, Whangarei, Hastings, and the Hauraki district. "High prices and lower yields in the Auckland market appear to be encouraging investors to look to regional centres around the country for investment properties," Rush said. House values in Wellington and Christchurch remain "relatively flat", with values rising just 0.3 per cent and 0.4 per cent respectively in the past three months. Dunedin's values are rising steadily, increasing 2.4 per cent in three months. While recent global events such as the Chinese stock market fall had knocked business confidence in New Zealand, there was no sign it had impacted house prices, Rush said. "More listings are coming onto the market with the coming of spring but with sales numbers up by 25% compared to this time last year stock levels remain tight in many places." Average values for August in the main centres and annual changes, according to QV, were: Auckland $874,851 (up 20.4 per cent), Hamilton $400,811 (up 10.3 per cent), Wellington $546,914 (up 2.4 per cent), Christchurch $476,317 (up 3.1 per cent), Dunedin $299,508 (up 3.7 per cent). In provincial areas, values rose most in the upper North Island, decreased in parts of the central and lower North Island, and were mostly flat with some small increases in the South Island. Queenstown Lakes district had the highest average value outside Auckland at $731,093. IPTI Xtracts Page 1

2 NEW WITHHOLDING TAX ON RESIDENTIAL LAND The Government will fortify recent efforts to regulate foreign investment in the residential property market by introducing a new withholding tax. The tax is intended to complement the new two year capital gains tax. The capital gains tax will soon catch those who purchase and sell a property within a two year period. There are various exemptions, the main one being where the property is used as the owner's main residence. Where a foreign investor has no taxable presence in New Zealand it would be difficult for Inland Revenue to impose tax under the new rules. The investor may not be aware of their New Zealand tax obligations and Inland Revenue may not have sufficient contact information to notify an investor of their obligations. To address this concern the Government has introduced a two-fold solution. Firstly, non-resident investors will be required to obtain a New Zealand IRD number. Secondly, the Government will obligate conveyancers and solicitors to collect the tax on behalf of foreign investors during the conveyancing process. The new withholding tax will be imposed on sales of residential land where the vendor is an "offshore person" and will be taxable under the two year test. To be exempt from the withholding tax, a person who falls within the test will be required to provide supporting information that they are not an "offshore person". Proof may be in the form of passport or birth certificate. The amount of tax withheld will be the lower of 10 per cent of the sale price of the property or 33 per cent of the vendor's gain on the property. The vendor's gain is equal to sale price less acquisition price. To reduce compliance costs and simplify the process, deductions that are normally claimed when calculating the gain are ignored in calculating the vendor's taxable gain. The application of the "lesser of" rule means that if a loss is made on the sale no withholding tax obligation will arise. For example, the new rule will apply where an overseas person acquired a residential property for $500,000 and sold it, within a two year period, for $700,000. The withholding tax would be $66,000, as this is the lesser of 10% of $700,000 and 33% of the vendor's gain of $200,000. The tax will not be a final tax on property gains. Vendors hit with the new withholding tax must lodge a New Zealand income tax return where tax withheld will be credited against the final tax payable. Inland Revenue is asking for feedback on whether the withholding tax obligation should be imposed on the vendor's solicitor or the purchaser's. Withholding tax on property related transactions for non-residents arise in other jurisdictions, including the United States and Canada. Recently Australia announced similar proposals. The proposals align New Zealand with international practice and ensure international persons benefitting from New Zealand's rising house prices pay their share of tax. PROPERTY RULES STRENGTHENED BY TAXATION BILL Revenue Minister Todd McClay and Land Information Minister Louise Upston say people buying and selling property for profit will now be unable to avoid paying their fair share of tax. IPTI Xtracts Page 2

3 Provisions introduced in the Taxation (Land Information and Offshore Persons Information) Bill passed the Third Reading in Parliament today. The resulting measures amend the Land Transfer Act and Tax Administration Act 2015, and will see Land Information New Zealand (LINZ) collect additional information when property is bought and sold, and pass this information to Inland Revenue. Under this legislation, buyers and sellers will have to provide their IRD number and other details when transferring property unless it is, or will be, their main home, Mr McClay says. Those who are tax resident elsewhere must provide their IRD number from that country and offshore persons need a working New Zealand bank account to get a New Zealand IRD number. The requirements apply to contracts entered into on, or after, 1 October. From 1 April 2016, all additional information must be provided regardless of when the contract was entered into. The main home exemption does not apply to offshore persons or trusts. Most people do the right thing and pay their taxes, but there has been some concern that compliance with taxes on certain property transactions particularly by non-residents may be relatively low, Ms Upston says. The additional information will help us better understand the housing market, and help Inland Revenue follow up on those people who have tax obligations. New Zealanders have a right to know that everyone is paying their fair share of tax. This new legislation will ensure that happens, without affecting New Zealanders who have worked hard and saved to buy their family home. FARM RATES UNDER THE SPOTLIGHT The rates spotlight is on farms and lifestyle blocks, with reaction mixed to a proposed rating change. Rural properties under 6 hectares could pay an average $73 more annually and those over 50ha an average $1353 less under the Auckland Council proposal. Properties between the two are unchanged at 80 per cent of the urban general residential rate. All are charged the same rate now. Meetings to gauge public feedback in the Rodney Local Board area will be held in the Waitoki Hall on Thursday and the Shoesmith Hall in Warkworth on September 22, both from 6pm-8pm. The proposal is to increase the smaller properties to 83 per cent of the urban general residential rate and reduce the bigger properties to 60 per cent. This is based on a discussion document suggesting large rural properties tend to be further from council services and have unsealed roads. They also create jobs and reduce the need for people to commute to the city, the report says. Conversely, smaller properties are usually closer to town centres, sealed roads and generally get access to most council services. "They also tend to be in areas with higher household incomes and are associated with urban commuting, creating demand on transport services," the discussion document says. Farmers like Rodney Local Board member Thomas Grace, who owns a large Woodhill property, see some merit in the proposal, particularly with many farmers facing tough times. IPTI Xtracts Page 3

4 But Kumeu-Huapai Residents and Ratepayers Association secretary and lifestyle block owner Mark Hall wonders if this is the thin end of a wedge for smaller rural property owners. He's also questioning why no meetings have been scheduled in west Rodney. "I might be being pessimistic but I wouldn't be surprised with all this development going on that at some time in the future we might be pinged," he says. "The council's not going to give away an opportunity to increase its rating base." Hall says the association has yet to discuss the issue. No decision on any change is likely until the council sets its annual plan. Consultation feedback closes on October 2. That will be analysed by a financial policy team for October's finance and performance committee meeting, which will decide whether to recommend any changes to the governing body. If changes are planned to the rating policy, then formal public consultation will start. A decision and report will be available on the council's Shape Auckland website in early November. AUCKLAND RURAL LIFESTYLERS FACE POSSIBLE RATES HIKE Leave us alone. This is the reaction of Dave Smith who says he is one of 19,900 Auckland property owners staring down the barrel of a rates increase. Auckland Council has started testing the waters as to whether it should charge small farm and rural lifestyle properties an average $73 more each year in order to reduce the rates of 1200 of the largest rural property owners by an average $1353. Smith is president of the Oratia Residents' and Ratepayers' Association, which represents largely small rural property owners, and says the suggestion is another council hand in their pocket. "It does look as though it's large influential property owners trying to drive the council to decrease their rates and we are maybe seen as a soft touch," he says. "People need to familiarise themselves with this issue, read the proposal and provide feedback to the council." The council's discussion document says that at the moment all rural farm and lifestyle properties pay rates at 80 per cent of the urban residential general rate. "The council thinks this difference in rates is fair as farm/lifestyle properties have lower access to council services compared to other types of properties," the document says. The new proposal though is to increase rates for smaller properties of up to 60,000 square metres to 83 per cent of the urban rate, and decrease properties of more than 500,000 square metres to 60 per cent. Eighty-five per cent of the larger properties are stock or dairy farms, and 7 per cent are forestry. In contrast, 95 per cent of the smaller properties are lifestyle properties. Oratia Residents' and Ratepayers' Association secretary Penny Sparks says the new proposal should have been part of the discussion when the council reviewed all the rates last year. IPTI Xtracts Page 4

5 "It's pretty exhausting, to be honest," she says. "If the council shut down tomorrow I don't think Oratia would even notice. We get very few services." The discussion document gives some reasons why large farms should pay less and small lifestyle properties more. "Large properties tend to be further from council services, and have unsealed roads," it says. "They create local jobs and reduce the need for people to commute to the city." The document goes on to say that smaller lifestyle properties tend to be closer to urban areas and facilities and usually have sealed roads. "They also tend to be in areas with higher household incomes and are associated with urban commuting, creating demand on transport services." Auckland Council is seeking feedback until October 2 and will decide by the end of October whether it should consult formally. TRANSPORT RATE TO FEATURE IN AUCKLAND COUNCIL'S BUDGET DEBRIEF A new transport rate that helped lift average household rates increases to 9.9 per cent this year will be part of a council debrief on the budget. Auckland Council is taking up a suggestion by the Auditor-General, Lyn Provost, to look at the lessons learned during the budget process, which nearly sparked a financial crisis for the Super City. In a report on the 10-year budget, she said the decision to a adopt a targeted rate for transport on May 8 was the topic of extensive debate, especially in terms of the transparency of the consultation process. Several councillors raised concerns with Ms Provost about an eleventh hour decision to introduce a $114 transport rate for households, which made up 4.4 per cent of the 9.9 per cent average household rates increases. Ms Provost said these concerns led to possible consequences of not adopting the budget being outlined to councillors in May and June, and reiterated by her on June 25, including the inability to set rates, the impact on the council's ability to raise funds and the potential increases in the cost of future borrowings. The formal adoption of the budget on June 25 went down to the wire and passed by a single vote. Ms Provost also recommended future 10-year budgets included targeted rates in the council's rates calculations so ratepayers can more easily see rates increases and compare other councils. A note from management said the council has never included targeted rates in rates calculations, "however we will consider the recommendation, taking into account other councils given the need for sector comparability". Ross Tucker, a senior finance officer, told today's audit and risk committee that officers would conduct the debrief and report back to the committee. The report will also go to the finance and performance committee. IPTI Xtracts Page 5

6 Ms Provost said in her report that overall the 10-year budget fulfilled its primary purpose of providing a basis for the council's decision-making and accountability to the community. IPTI Xtracts Page 6