New tax bad for housing development

Warnings about the negative impact a new property tax could have on housing supply come as the submission period on the Bill ends.

Friday, February 5th 2016, 12:00AM

by Miriam Bell

The Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill, which is part of the government’s new investment property tax reforms, was introduced into Parliament late last year.

It contains a proposal for a residential land withholding tax (RLWT), which will affect people who live overseas and sell a New Zealand property within two years of purchase.

While the RLWT aims to ensure that offshore property investors pay the required tax, concerns have been raised about the downstream impact of the legislation as it stands.

In a submission on the Bill, the Auckland District Law Society’s property law committee have said the RLWT could have a negative impact on the development of new housing.

This is because there are many offshore developers active in New Zealand and the ADLS is concerned that requiring the payment of RLWT on every transaction will have a serious impact on their cash flow.

“Cash flow is a critical element for any developer and, given the inability to offset costs when the RLWT is paid, this new regime will acts as a major clog on the development of residential property in New Zealand,” the submission said.

ADLS vice-president Joanna Pidgeon said offshore developers could respond to the RLWT by slowing down their housing developments, or by choosing to develop housing elsewhere.

This could have a severe effect on the construction and supply of housing in New Zealand, at a time when Auckland is already struggling with a significant supply shortage, she said.

“We understand the desire to ensure that overseas entities do pay tax. Some of them haven’t been and they will be caught, which is good.

“But there are a substantial number of law-abiding, tax paying offshore developers who will suffer a negative impact under the proposed regime.”

The legislation could include an exemption for offshore developers of good repute, who can prove a strong record of paying tax, Pidgeon said.

Alternatively, the ADLS submission proposed that a bank bond system should be incorporated into the legislation.

This would involve a bond being registered on the titles of unsold properties to secure payment of the RLWT at a later date. It would be discharged when the RLWT obligation was met.

Pidgeon said this would be an effective way of ensuring the necessary tax is paid – but without tying up developers’ capital.

“We would also like to see that any tax assessment mistake on the part of a “paying agent”, who is likely to be a lawyer, is deemed to be a civil issue rather than a criminal one.”

The ADLS is not alone in its concerns about the proposed RLWT.

Specialist tax consultant Terry Baucher said the ADLS had raised some valid points and the compliance costs involved with the proposed regime were significant.

“These things do have a displacement effect, so the onerous costs and requirements could well have a negative impact on housing development.”

However, his main concern is that a massive amount of compliance is being introduced for quite small fiscal gains.

“The burden is simply disproportionate to the intended gain. The ADLS suggestion of a bank bond system could be a neater way of dealing with the issue.”

Like the ADLS, Baucher was also critical of the limited consultation period given on the proposed legislation.

“The compressed timeline was not helpful. It could well be a case of ‘enact in haste, repent – or amend – at leisure’.”

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