Auckland Council says there would be economic and administrative issues with introducing a vacant land tax and questions whether it could be justified

Auckland Council says there would be economic and administrative issues with introducing a vacant land tax.

The Productivity Commission has been asked to look at the feasibility of a tax on vacant land as part of its inquiry into local government funding and financing. 

The commission released its draft report last month and is expected to present a final report to the Government in November.

But a report to the Auckland Council’s Finance and Performance Committee shows there are some concerns about how a vacant land tax could be justified, let alone how it would be administered.

“Officers consider there are economic and administrative issues with applying an additional tax on vacant land and unoccupied dwellings to encourage growth," the report says.

"A charge set on this basis does not support the [Productivity] Commission’s recommendation that rates be set based on the benefits that properties receive from council services. A tax on unoccupied dwellings is difficult to justify for local government funding purposes as there is no alignment between unoccupied dwellings and the services the council provides.”

Council concerns

Further to this, the Auckland Council’s draft submission on the Productivity Commission report states:

“The council agrees in principle with the idea of a charge on vacant land to incentivise better usage of existing infrastructure given the pressures on infrastructure financing and the demand for housing. However, the council considers that there are economic and administrative issues with the application of an additional tax on vacant land or unoccupied dwellings.”

And it says it would be hard to justify a new vacant land tax on unoccupied dwellings if there was no link between the council’s services and the property not being occupied.

“To apply this tax, we would need a clear definition of an unoccupied dwelling, which considers issues such as baches and holiday homes and dwellings in areas where there is no demand for housing. We would also need to maintain a database of unoccupied dwellings which could incur significant administrative costs and compliance issues.

“A tax on undeveloped land could only apply where there was a link between undeveloped land and under use of council provided infrastructure. This link can only be made where the undeveloped land has the appropriate zoning and is serviced by infrastructure that provides sufficient capacity to allow land to be developed. This rationale would allow the tax to apply equally to business as well as residential land.”

Administration dilemmas

And it doesn’t stop there. Coming up with a definition of undeveloped land and any possible overlap between the tax and development contributions developers are charged would also have to be taken into account.

“It would also need to consider any thresholds that should be applied such as the size of land parcels, whether land parcels meet feasible development tests and whether the land is infrastructure ready. The consequence of avoidance behaviours such as use of vacant land for car parking or temporary retail spaces would also need to be considered in any definition, as would legitimate land use such as timber yards and car yards, which have low levels of improvements."

It says the rate such a tax would be charged at would need to be high enough to provide owners with an incentive to rent, sell or develop their property.

“Establishing the optimum level of the tax would likely be difficult, be market specific and require further investigation. If the tax was set too low, it may not be effective while setting the level too high may be seen as excessively punitive. If the holding costs of land are less than 10% at present interest rates, then a vacant land tax would need to be set at 1% of land value in order to make a 10% change.”

The submission says according to the Auckland Council’s database there are about 29,000 urban properties that have an improvement value of less than 5% of the land value.

“For vacant land, we estimate that a rate increase of more than 100% for business and 300% for residential land would be required to increase annual holding costs to around one percent of the value of the land.”

Auckland Council Finance and Performance Committee chairman Ross Clow agrees with the submission’s findings. He says to make such a tax work it would have to hit the owners of vacant land and unoccupied properties in the pocket.

“It would require the levies to be pretty high,” Clow says. “And unoccupied buildings wouldn’t be easy to monitor or control. You would need to have people visiting them to make sure they are, or aren’t occupied. And then to administer it and establish it just wouldn’t be cost effective.”

Change takes time

Finance Minister Grant Robertson wrote to the chair of the Productivity Commission in April to ask for the local government funding and financing inquiry’s Terms of Reference to be expanded to incorporate the recommendations of the 2019 Tax Working Group (TWG) relating to taxing vacant land. But no more details on the proposed tax were included in the commission’s draft report released in July.

Robertson told interest.co.nz it would take some time to get the design of such a tax right. 

“There's a long lead time with tax legislation. We're certainly doing the work now and if that comes through in a way that's positive, we'd be looking to move on it. But there's obviously a legislative timeframe that would be associated with it."

He said ideally he would like to see a bill introduced to Parliament before the 2020 election, but it was a matter of looking at "what's possible". Robertson said he was still interested in the policy, however.