Property Tax Policy FAQ

Property Tax Policy FAQ

  • How will I pay property tax?

    Answer

    Property tax will be invoiced monthly or quarterly like rates. Like rates there will be options for regular smaller payments or larger quarterly or annual payments.

  • How will property tax be calculated?

    Answer

    Property tax will be based on the council valuation of the house and the banks reporting to the reserve bank of average money owing for the previous 12 months. This gives the owner’s equity in the property for the tax year.

  • Can I deduct my interest costs from property tax as it is a cost to generate this income?

    Answer

    No. The effect of interest costs are accounted for by only using the equity in the property rather than the total value of the property.

  • Would the bright line test for capital gains still exist?

    Answer

    Yes, in some form still to be determined. Property tax is not a capital gains tax, and the bright line sets a standard of behaviour for IRD that overrules stated “intention” for when the property is traded for income rather than capital gain.

  • Won’t introducing property tax make it even harder for first home buyers?

    Answer

    No. While property tax will be an additional cost after purchasing the house, the UBI and tax changes will make accumulating the deposit for the house easier. Introduction of property tax should slow house price appreciation, meaning house prices do not grow by more than the deposit saved every year. Initially with low equity in the house (around 20%) property tax will also be low.

  • Isn’t this just penalising hard working people?

    Answer

    It depends what you mean by hard working. If the definition of hard working includes owning a house that appreciates in value while you do little to nothing then yes. If the definition of hard working covers people working long hours at minimum wage jobs then absolutely not. The working poor (low paid fully or partially employed) benefit most from these changes, combined with the changes referred to in TOP’s Kiwi Dividend policy.

  • Isn’t this just an attack on NZ Super recipients?

    Answer

    No. NZ Super recipients get special treatment due to that group being asset rich and cash poor (in general compared to the rest of the population). They will be given the option to roll over property tax until the property is sold, so that there isn’t any effect on their available cashflow for living.

  • How will property tax affect farms?

    Answer

    The inclusion of farming within the property tax scheme would be delayed for some time after residential property, to allow for smoother implementation and no sudden changes in tax take or land values relating to farming. It would also allow for time for conversion of poorer performing parts of farms or existing stands of regenerating native bush to QE2 covenanted areas, to truly reflect productive areas of the farm (reducing RFRM liable area and value), while improving long term environmental outcomes.

    This depends on whether the farm is operating as a business or is effectively a large lifestyle block. Property tax will become a minimum level of tax incurred on equity in a property asset, so in a given year, if income tax exceeded the amount of property tax that would be due, there would be no additional tax due.

    For a farm that regularly exceeds the rate of income to avoid property tax but will also have some years where returns are low (low milk pay-out, poor yields in dry/flood years) the tax due can be rolled forward so long as the average tax payment over any 5 year period exceeds the property tax due.

    Example 1

    A 1 hectare $300,000 freehold farm has a roadside stall that sells free range eggs and fruit when in season. After costs for chicken food, fertiliser and sprays the stall makes $5,000 per year and would incur income tax of $1,650 at the new income tax rate of 33% (refer to TOP’s Kiwi Dividend policy). The level of property tax incurred on this property would be $2,970 ($300,000 x 3% minimum return on equity x 33% income tax rate). The difference of $1,320 ($2,970 - $1,650) would be incurred to raise the tax owing to the level of property tax due. If the stall generated $10,000 profit per year, then the income tax of $3,300 would exceed the property tax minimum, so no further tax would be due.

    Example 2

    A dairy farm valued at $8,000,000 with debt of $3,000,000 generates an average profit of $200,000 per year over five years with a bad year returning only $100,000. With $5,000,000 equity the required return on equity for property tax is $150,000, so the minimum tax requirement each year would be $49,500. In the average year of a $200,000 profit, the income tax of $66,000 ($200,000 x 33% income tax rate) would exceed the property tax level of $49,500, so no further tax is due. In a bad year the $100,000 profit only generates a tax bill of $33,000, so a further $16,500 will be incurred to meet the property tax requirement. However, this $16,500 liability can be carried forward to subsequent tax years to match cash flows from years with better returns.

  • How will property tax affect lifestyle blocks?

    Answer

    Lifestyle blocks are treated like residential housing. There is no separation of land area into house or family home land and other as was proposed under the capital gains tax proposed by the tax working group. Whatever equity the owner holds in the lifestyle block will be subject to the property tax as would a residential property of the same value.