Land tax lambasted at seminar

Press, 26 April 1989, Page 59

Land tax lambasted at seminar

Land tax, boosted by big increases in commercial property values, is bleeding businesses in Wellington and now its grip is extending to other cities as the cycle of new Government valuations takes effect, writes Graeme McGregor, editor of the “New Zealand Real Estate” journal, who reports as follows.— Some startling statements emerged from a Land Tax seminar organised by the Real Estate Institute in Wellington recently. Among them were: • That because of the influence of inflation in recent years on property values, the Government is enjoying an enormous windfall. Land tax this year was around $145 million and next year it is expected to yield the Government at least $250 million. ® That the unexpected jump in the tax yield is driving a wedge into business profitability, which reportedly is already leading to some business closings, job losses and leaving some investors facing loss of equity. • That with Auckland now being hit, involving the electorates of a number of Government members of Parliament, it is claimed that the Government is now anxious to address the situation. However, several speakers urged the seminar to reject the Government’s calls for suggestions on modifications to the act to achieve a more acceptable result on the grounds that. — (1) the tax was discriminatory, inflationary and unfair, and (2) acceptance of the need to reduce the tax rate and/or increase the threshold at which it applied would compromise the mission of investors and tenants which was to have the tax abolished. The seminar was told that land tax is levied at the rate of 2% of the value of commercial land valued at over $350,000 subject to certain exemptions. With property revaluations of cities now occurring in the wake of soaring land values in the recent period of abnormally high inflation, the impost of the tax is leading to an “unmanageable burden” on the commercial sector. The tax, unlike income and other types of tax, is not based on production or earnings. Like local body rating it is applied directly to the value of the land, and is effected whether or not the property is returning a profit or indeed whether or not there are any improvements on that land such as commercial premises or other revenue-pro-

ducing activities. Wellington was hit first, with the revaluation of the central business district producing increases in valuations in excess of 600%. The capital’s Mayor, Mr Jim Belich, told the seminar that implications of payment of land tax on those increased values, which applied in Wellington a year before Auckland, and even longer before taking full effect in Christchurch, has had and was still having “a devastating effect on the CBD of Wellington City.” In the last year an additional burden of $6O to $7O million had fallen on the commercial sector. Mr Belich added: “The mid--1987 valuations locked us into a pre-stock market crash mode which is now unsustainable; the huge escalation between 1984 and 1987 has made a nonsense of the existing exemption.” He said that land tax in Wellington last year rose from about $l3 million to more than $BO million with much, if not most, of that increase being passed on to tenants, with disastrous effects to their costs of operations. The seminar was told that the Wellington Chamber of Commerce had also played a major role in investigating and exposing the damaging effects of the tax. Speakers said that some businesses had already closed and there would be job losses. An accountant handling liquidations and receiverships said that in several cases the victims had cited the impost of land tax as being the final straw leading to their financial collapse. He described the tax as being inflationary, stating that it was pushing up. prices and affecting earnings, resulting in job losses. Mr Ron Hewitt, national president of the Real Estate Institute and chairman at the seminar, agreed with those concerns, and said that redevelopment within the commercial sector should not be forced by a tax because such moves had to be timed correctly to enhance chances of investment success.

Mr Barry Purdie, executive director of the Retail and Wholesale Merchants Association, said that basically the problem was the Government’s insatiable demand for revenue. Emphasising the effect of greatly increased payments of land tax on small businesses, he quoted the case of the tax on a small two-storey business in Willis Street in Wellington jumping from $20,000 to $132,000 and the Scout Association building in Guznee Street increasing from $3600 to $15,000 as a result of the new Government valuations.

Throughout the seminar speakers said it was not the responsibility of business people to advise the Government of alternative forms of tax revenue should the land tax rate be lowered or the tax abolished. Mr Purdie’s comment was: “I don’t accept that it is our responsibility to provide an acceptable alternative for the Minister of Finance. Our responsibility is to show land tax as being unfair, iniquitous and unacceptable.” Two other speakers thought that land tax should be based on the capital value of properties, and applied to all properties throughout New Zealand without exception and levied at a rate to yield the present “windfall” figure of $145 million. Others were opposed to that, one stating that the Minister of Finance already knew of one acceptable alternative — abolishing land tax and reducing Government spending by the same amount of tax that would have been collected.

A representative of an investment company which owns a prominent two-storey retail centre in the heart of Manners Street, in Wellington, said its land tax had jumped from $30,000 to more than $200,000 although it was the same building containing the same tenants carrying out the same operations as before the increase applied. The company’s lease agreements did not allow it to pass on the increases. He said: “There is only one answer to this tax — and that’s to abolish it. If you are seeking a compromise, don’t count me in.” The seminar had been told that land tax was introduced last century to encourage the breaking up of large rural holdings in the South Island. Mr Malcolm Woods, a director of Woods Consulting Group, speaking on behalf of property investors, said that land tax had destroyed some of the risk perception in property investment. Investors of smaller properties were now being forced to consider redevelopment in order to spread the burden of land tax over a greater amount of rental area on the site. “This is town planning by fiscal edic. It’s ridiculous.” Mr Wood said to say that land tax was a wealth tax was ridiculous. It was levied on a nonexistent value. It was not related to income or to ability to pay. Payers were being taxed on unrealised gains. “If New Zealand is going to have a taxation regime that is fair and equitable, then land tax has to go. There can be no question of a trade-off.”

Mr Arthur Stewart, a commercial valuer, cited an example of a two-year-old building built in Wellington in excess of the city’s planning plot ratio by the inclusion of residential accommodation and through use of an art bonus, where the basic rental met by the lessees averages $l9 per square foot and the outgoings estimated in this financial year would add a further $23 per square foot to the occupancy cost with land tax alone amounting to $l3 per square foot of the estimated outgoings.

“The rental is due for review mid-1989 and the owner has no prospect of achieving a rental increase.

“Where, then, is the encouragment to invest when building outgoings before financing costs exceed the income of the owner?” The net effect is the value of the property will be ultimately reduced and if financed it is likely that the owner will, in the short term, lose all equity in that property.

In his address to the seminar, Mr Neilson, the Associate Minister of Finance, said the Government could solve the problem of sudden large increases by utilising more frequent valuations, say annually, but advice was that the additional cost of valuing commercial properties liable for land tax would be $BOO,OOO a year. He stated that the Government was aware that problems had been created as a result of increased valuations and that land tax itself did not sit comfortably within the Government’s tax regime. When told during question time that the tax was losing the country businesses and jobs and that paying unemployment benefits to, say, a further 2000-3000 out-of-work people would equate to the $145 million that the Government was currently collecting in land tax, Mr Neilson said the present Government did not introduce land tax nor change the rate (raised to 2% in 1981) or change the valuation system (from 5 years to 3 years). “We are aware, however, of the circumstances and will take them into account in the review (covering land tax) later this year.”

Later he said that the Government had heard clearly what the property industry wanted. “But I can only say that abolition at this point is not likely, and that Government will review the situation in respect of making adjustments.”

The seminar decided to call on the Government to abolish land tax forthwith.