How will property tax affect farms?
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.
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.
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.