LOCAL GOVERNMENT (AUCKLAND LAW REFORM) BILL

Transcription

1 Supplementary submission to the Auckland Governance Legislation Committee LOCAL GOVERNMENT (AUCKLAND LAW REFORM) BILL 26 February 2010

2 SUPPLEMENTARY SUBMISSION To the Auckland Governance Legislation Committee on the Local Government (Auckland Law Reform) Bill INTRODUCTION 1. This supplementary submission is from the Auckland City Council. It is additional to our main submission, which was provided to the committee on 12 February This supplementary submission has been approved by the council. 2. As foreshadowed in our main submission, our supplementary submission addresses issues relating to the ownership of assets between the Auckland Council and its CCOs, and tax neutrality issues. A. ASSET OWNERSHIP General comments 3. The question of whether the Auckland Council or any of its CCOs should own certain assets is important. Ownership affects the level of control an entity has over assets, and perceptions about the security of public ownership. There are also important tax consequences that flow from asset ownership. 4. Most of the Auckland Council s new CCOs are likely to be set up before the Auckland Council is established on 1 November The Council will, therefore, have had no say in the decisions about whether particular assets should be owned by the Council itself or by one of its CCOs. Preferably, the Council should make these decisions itself. This would be possible if all assets were initially vested in the Council, and it was then able to determine what, if any, assets should be allocated to its particular CCOs. The one exception to this is Watercare, which we accept should own all water and wastewater assets. This is discussed in more detail in section A.1 below. 5. We recognise, however, that there is a real possibility that assets may be vested in various CCOs, other than Watercare, in line with the approach currently set out in the Bill. Accordingly, the remainder of our submission on asset ownership (sections A.2 to A.3) is drafted on this basis. A.1 Auckland Council should decide who owns assets Clauses 6. A number of clauses in the Bill deal with asset ownership. Page 1

3 7. Proposed section 35J in clause 24 provides that assets belonging to the existing councils may be vested in Watercare. Also, the assets of Metro Water and Manukau Water will be transferred to Watercare as a result of proposed section 35B(1)(b) in clause 24 and Schedule 4 (in Schedule 1 of the Bill). 8. Clauses 50(1)(a) and 52(1)(a) transfer the assets of the Auckland Regional Transport Authority (ARTA) and the Auckland Regional Transport Network Limited (ARTNL) to Auckland Transport. All other transport assets will remain with the Auckland Council (proposed section 42(4) in clause 45). 9. For other CCOs, the Bill provides for the transfer of assets from terminating organisations to receiving entities (proposed section 35B(1)(b) in clause 24). Proposed section 35F(2) in clause 24 provides that a receiving entity can be the Auckland Council, any existing local government organisation that will be a CCO, or a new CCO established under proposed section 35G in clause 24. It is possible that any of these organisations may receive assets currently held by existing CCOs. Issue 10. It appears that all water and wastewater assets will be transferred to Watercare. This is consistent with current arrangements. As Watercare is a self-funding entity, asset ownership would incentivise it to properly balance asset maintenance with asset renewal and funding for depreciation. Therefore, we agree that it will be appropriate for Watercare to own all water and wastewater assets. 11. We do not, however, agree that the other CCOs, including Auckland Transport, should have assets transferred to them under the Bill. Rather, all other assets should initially be vested in the Auckland Council to enable it to make the decisions on who should own which assets. 12. Asset ownership is a key consideration when a council is deciding whether and how to establish a CCO. Before transferring assets to a CCO, a council will consider a range of factors, such as: the degree to which the CCO is self funding and the level of ongoing ratepayer funding required; the nature of the business it is undertaking (for example, commercial versus public good); and whether the related assets are strategic in nature, are subject to strong political and public interest, and require a high degree of integration with other assets and activities of a council. A council would Page 2

4 also consider the tax, accounting and asset management implications, as well as the need to ensure that the CCO is able to maintain effective control over its business activities. 13. In Auckland s case, some new CCOs will be set up prior to the establishment of the Auckland Council itself. Accordingly, the Council itself will not have had the opportunity to consider and weigh up the factors discussed above. 14. It would be preferable for the Auckland Council to be able to consider and determine asset ownership issues itself, given that it will be the elected body for Auckland and there are significant political considerations in determining asset ownership. In order for the Council to be able to make these decisions itself, it would be necessary to initially vest all assets in the Council. 15. Such an approach is consistent with our main submission. We included a recommendation that transfer provisions should be added to the Bill to enable the Auckland Council to undertake restructuring of its CCOs for a transitional period, being the 10 years following the Council s establishment (paragraph 125 of our main submission). We consider that, given the Council s lack of involvement in the set up of its CCOs and given that such a large amount of work will be undertaken by CCOs, it is likely that the Council will want to undertake restructuring of its CCOs within the first 10 years. Recommendation 16. Ensure all assets (other than water and wastewater assets) are initially vested in the Auckland Council by: amending proposed section 35F(2) to provide that a receiving entity will always be the Auckland Council (or Watercare, where the terminating organisations are Metro Water and Manukau Water); and amending clauses 50(1)(a) and 52(1)(a) to replace the references to Auckland Transport with references to the Auckland Council, so that the Council receives ARTA and ARTNL s assets. 17. If our recommendations above are adopted, then our recommendations in the remainder of this asset ownership section (A.2 and A.3) are irrelevant. A.2 Auckland Council should own transport assets Clauses 18. Clauses 50(1)(a) and 52(1)(a) transfer ARTA and ARTNL s assets to Auckland Transport. Page 3

5 Issue 19. The assets owned by ARTA and ARTNL, which will be transferred to Auckland Transport, are public transport related assets. However, the existing councils also own some public transport assets, and these will be vested in the Auckland Council (under section 35(1)(c) of the Local Government (Tamaki Makaurau Reorganisation) Act 2009). There will, therefore, be split ownership between Auckland Transport and the Council of Auckland s public transport assets. We do not support this approach. One entity should own all of the public transport assets so that a consistent and unified approach can be taken. 20. In our view, ownership of all local government transport assets, including public transport assets, should sit with the Council. Transport assets are often strategic in nature, and there will be a high level of political and public interest in transport and the ownership of transport assets. Public concerns will be better addressed if the Council owns the assets concerned. In addition, a high degree of integration is generally needed between transport assets and other council activities. The Council will be best placed to ensure this integration occurs. 21. Council ownership of the assets would not impede Auckland Transport s ability to carry out its functions. This is evidenced by the fact that ownership of all roads will vest in the Council (by virtue of section 316(1) of the Local Government Act 1974, which is confirmed by proposed section 42(4) in clause 45). Recommendation 22. Amend clauses 50(1)(a) and 52(1)(a) to replace the references to Auckland Transport with references to the Auckland Council. A.3 All other CCOs Clauses 23. Proposed section 19B in clause 18 provides for the Auckland Transition Agency to establish a Waterfront Development Agency under proposed section 35G in clause 24. New CCOs established under the Order in Council process provided in proposed section 35G can be receiving entities under proposed section 35F(2) in clause 24, meaning that they may receive assets from existing CCOs. Page 4

6 Issue 24. It is clear that a Waterfront Development Agency will be one of the CCOs established under proposed section 35G. If the Waterfront Development Agency s purpose is to undertake the commercial property development proposed for the waterfront area, it could potentially be appropriate for the agency to own assets. However, we consider that other factors outweigh this. The waterfront assets are of significant strategic, political and public importance. They will contribute to wider Council objectives, particularly relating to economic development and quality of life. There is an overarching interest in ensuring ongoing public ownership and political accountability. Accordingly, ownership of the waterfront assets should remain with the Auckland Council. 25. The Auckland Transition Agency has proposed that four new CCOs will also be established under proposed section 35G. The likely CCOs are: Economic Development and Tourism; Property Holdings and Development; Major Regional Facilities; and Council Investments. 26. Apart from the Council Investments CCO (as discussed below), we consider that the Auckland Council should own all assets in relation to the areas of responsibility for the other CCOs. Our reasons for each CCO are as follows: Economic Development and Tourism it is unlikely that this CCO would own any assets of note. So to the extent that assets are involved, we consider they should be owned by the Council, given that the CCO will be heavily reliant on ratepayer funding. Property Holdings and Development it is likely that this CCO will manage significant property holdings for the Council, many of which are likely to be strategic in nature. As well, property development is closely tied in with broader Council objectives. As such, ownership would best sit with the Council. Major Regional Facilities this CCO will undertake the management of regionally significant assets such as the Auckland Zoo and Art Gallery and will be heavily reliant on ratepayer funding. It would be appropriate for ownership of regionally important facilities to remain with the Auckland Council. Page 5

7 Council Investments The proposed Council Investments CCO will presumably have a strong commercial objective, meaning it may be beneficial for it to own assets so that it can respond quickly to commercial opportunities and maximise the economic performance or potential of the assets. However, the CCO is likely to hold assets that are arguably of strategic importance, including the shares in Auckland International Airport and in Ports of Auckland. We consider that Auckland Council should retain ownership of these important assets, but the CCO should own all other relevant assets. Recommendation 27. Amend proposed section 35F(2) to provide that the Auckland Council will be the receiving entity in all cases, except in relation to a Council Investments CCO, where the CCO may also be a receiving entity. B. TAX STATUS General comments 28. It is likely that some council activities that are currently carried out by tax exempt entities (notably the existing councils and Auckland Regional Holdings) will, after 1 November 2010, be carried out by tax paying CCOs. The resultant tax burden will directly impact on Auckland s ratepayers, either through charges imposed by CCOs or through increased rates to cover the additional tax payments. Our view is that activities that are currently undertaken by tax exempt entities should remain tax exempt so as to avoid this impact on ratepayers. B1 Appropriate that Auckland Transport is tax exempt Clauses 29. Schedule 3 of the Bill includes amendments to the Income Tax 2007, which provide that Auckland Transport will not pay tax. Issue 30. We support Auckland Transport having tax exempt status. Recommendation 31. No change. B.2 Watercare should be tax exempt Clauses 32. A new clause is needed to provide that Watercare is a tax exempt organisation. Issue 33. Currently, Watercare is a taxpayer. So too are the Auckland and Manukau City Councils CCOs, Metro Water and Manukau Water. However, the other existing councils have retained responsibility for local water supply and waste water Page 6

8 services, meaning these activities enjoy the tax exemption provided to councils. 34. All water and wastewater assets are likely to transfer to Watercare, including the assets of the existing councils (under proposed sections 35B(1)(b) and 35J in clause 24). Watercare will be obliged to pay tax on activities that are currently tax-exempt. As a result, Watercare s charges or funding to Watercare would have to be increased to cover the additional tax payments, directly affecting ratepayers. 35. In practice, Watercare has not had to pay significant amounts of tax. This is because of the obligation on Watercare to ensure minimum pricing and the prohibition on it paying a dividend (both of which continue under proposed section 49 in clause 45). Arguably, having Watercare as a tax paying entity creates compliance costs for Watercare that are out of proportion to the benefit that the Government receives in tax paid by Watercare. Similarly, neither Metro Water nor Manukau Water have to date incurred significant tax costs. 36. The tax that Watercare would pay relates primarily to the surpluses that it builds up, to fund capital expenditure and debt repayment. Such surpluses are necessary because infrastructure projects for water services have long lead-in times. In contrast, no other council in the country is obliged to pay tax on the surpluses that need to be accumulated to fund water related infrastructure projects. 37. It is inconsistent for Watercare to pay tax when it is prohibited from paying a dividend. Therefore, we consider that it would be appropriate to exempt Watercare from paying tax, on the basis that the obligation to ensure minimum pricing and the prohibition on paying a dividend will continue to apply to Watercare, and to ensure parity with other New Zealand councils. Recommendation 38. Amend Schedule 3 to add further amendments to the Income Tax Act 2007 to provide that Watercare is not required to pay tax given that it is prohibited from paying a dividend. B.3 All other CCOs Clauses 39. A new clause is needed to provide that activities that are currently not taxed will remain non-taxable for a transitional period. Issue 40. At present, a number of activities are undertaken by tax exempt entities. The restructure of Auckland s local Page 7

9 governance is likely to transfer responsibility for some of these activities to taxable CCOs. This has the potential to significantly increase the amount of tax that the Auckland Council group will pay (in comparison to the amount of tax currently paid by the existing councils and their CCOs). This would have a significant financial impact on Auckland s ratepayers. 41. This issue will be particularly significant in relation to Auckland Regional Holdings. Auckland Regional Holdings is currently a tax exempt entity (under the Income Tax Act 2007), and has been tax exempt through its various legislative guises (including Infrastructure Auckland, Auckland Regional Services Trust and the Auckland Regional Authority). The Bill provides that Auckland Regional Holdings will continue to exist as a CCO (clause 49(2)(d)). It is, however, possible that many of the activities of Auckland Regional Holdings will be transferred to the new Waterfront Development Agency and Council Investments CCOs, which have been proposed by the Auckland Transition Agency. If this occurs, then tax will have to be paid in respect of those activities. 42. The impact on ratepayers would be significant. If Auckland Regional Holdings was a taxable entity, it would have paid in the region of $50 million in tax over the last five years (as advised by Auckland Regional Holdings). Activities currently undertaken by Auckland Regional Holdings should continue to be tax exempt, otherwise ratepayers will have to pay considerably more in rates to cover the additional tax payments. 43. We consider that this principle should apply more generally, not just to Auckland Regional Holdings. Any activity that is currently undertaken by a tax exempt entity (generally the existing councils) should generally remain tax exempt. 44. The decision to remove activities from within the council (which is tax exempt) to a tax-paying CCO is normally undertaken by a council with full understanding of the tax consequences. The tax cost is weighed against other economic benefits gained from establishing the CCO. Under the proposed provisions in the bill, the Auckland Council will not have had the opportunity to undertake this analysis and decision-making itself in relation to its CCOs. 45. We consider that new CCOs established under proposed section 35G should be exempt from paying tax for a Page 8

10 transitional period to allow the Council time to review its CCO arrangements. In line with our recommendations about asset ownership (in paragraph 16 above) and about transfer provisions to enable restructuring of CCOs by the Council (in paragraph 125 of our main submission), we suggest that 10 years would be an appropriate transitional period. At the end of the 10 year period, the CCOs would become taxable (as is usual), unless specific provision were made otherwise in the Income Tax Act. A 10 year period would give the Council sufficient time to restructure its CCO arrangements, bearing in mind the tax implications. Recommendation 46. Amend Schedule 3 of the Bill to include further amendments to the Income Tax Act 2007 to provide that all new CCOs established under proposed section 35G will be tax exempt for until 1 November Page 9