The Auckland Council will decide on Wednesday whether to proceed with the transfer of $758 million worth of prime waterfront property from Council Controlled Organisation (CCO) Panuku to itself.
The Council has until the end of June to go ahead with the property swap to avoid paying a $220 million tax bill under new tax changes that come into effect from July 1. The real estate involved includes Wynyard Quarter and adjoining sites, large parts of the Viaduct Basin, as well Queens Wharf and the Westhaven Marina.
The issue first surfaced in a council report in February, which outlined how it only had until the end of June to proceed with the change of ownership deal with Panuku or face a massive tax bill.
“New Zealand’s tax law is changing. From July 2019, transferring assets from a council-controlled organisation (CCO) to the Council Entity for no cost would be considered taxable income. A transfer of waterfront land properties after 1 July 2019 is likely to have a significant impact on rates and debt. Depending on the exact make-up of the properties to be transferred this could cost the council approximately $220 million.”
Auckland Council Finance and Performance Committee chairman Ross Clow said that the issue centred on Panuku’s role as a council development agency and not a long term property owner. It owns and manages large sections of the City’s waterfront real estate, including land, buildings, development sites and marinas. Panuku has title over the properties it is developing, but once it has carried out the work it is then generally expected to transfer ownership back to the Council.
Clow said the main issue was whether the Council would decide to let Panuku maintain ownership of the assets, or transfer some or all of them back to the authority.
In February the Council’s Finance and Performance Committee voted to proceed with a public consultation process on the issue as part of its Annual Budget 2019/2020 process.
The Council’s consultation document also included alternative options such as leaving the assets in Panuku’s ownership, or transferring some of them, including either completed development properties only, or transferring the completed and future development properties only. According to the Council, the majority of submitters (60%) supported the proposal to transfer all of the assets, with 25% supporting the proposal in part and only 14% opposing it.
The agenda for next week’s Finance and Performance Committee says the Council has since been in contact with the Inland Revenue Department (IRD) about its property swap dilemma.
“Due to changes to tax law, if the transfer were to happen after 1 July 2019 it would attract a substantial tax liability. Therefore, it is prudent to make this transfer of legal ownership of waterfront properties from Panuku to the council now. A binding tax ruling has been obtained from Inland Revenue which confirms that if the transaction proceeds prior to 1 July 2019, then Auckland Council will not be taxed on the derived income from transfer of the land from Panuku.
“The Inland Revenue also issued a second binding ruling on 2 May 2019 (valid until 30 June 2022) which confirms that once the assets return to Auckland Council the revenue derived by council will not be subject to tax.”
Under the plan Panuku will continue with redevelopment agreements, including long-term leases that are required to achieve the objectives of the Waterfront Plan 2012 and for the 36th America’s Cup. It will also continue to act as landowner over the waterfront public spaces and manage the Westhaven and Silo marinas.
“Under a Transaction Agreement, Auckland Council will purchase the assets from Panuku at a purchase price equal to fair value. The purchase price will be based on the net book value of the waterfront assets (expected to be approximately $758m). The purchase price owing by Auckland Council will be offset by a dividend (approximately $272m) and share repurchase (expected to be approximately $486m) from Panuku to Auckland Council, at least equal to the amount received by Panuku from Auckland Council, and may include additional return of equity as appropriate. This will result in no cash changing hands.”
But one curve ball that has arisen from the transfer proposal was outlined in a letter to Mayor Phil Goff and the Auckland Council from Panuku board chairman Adrienne Young Cooper which states:
“We understand that the proposed transfer of assets may trigger Viaduct Harbour Holdings Limited (VHHL) first right of refusal related to the waterspace in the Viaduct Marina area. Panuku is seeking further advice from Auckland Council and our legal team regarding these assets.”
According to the Council report the properties involved are berths in the Viaduct Basin that are currently valued at $2 million. But the committee report says the best way to avoid potential legal action is to leave the ownership of the property with Panuku, therefore extinguishing Viaduct Harbour Holdings Limited (VHHL) first right of refusal.