National's advice says its proposed foreign buyers 'fee' could be established as a criteria for overseas investment, rather than as a 'tax'

A tax consultant says the National Party would be able to charge foreign buyers a 15% fee without breaching New Zealand's free trade agreements — as long as they don’t call it a tax.

The party sought advice from an international law and trade policy consultant based in Wellington prior to announcing its policy last month. National released the advice to journalists on Monday, but asked the media not to name the consultant who provided it.

A letter written to National’s trade spokesperson Todd McClay, on August 25, said it was possible to charge a fee on the purchase of residential property by overseas persons. While many of these agreements included obligations to treat foreign buyers the same as local ones, there were enough carve outs and exemptions to impose a new fee. 

“It is possible that, even if it is referred to as a “foreign buyer tax”, it may not be considered to be formally a tax from the perspective of international trade obligations,” the consultant said. 

If it were not considered a tax, then New Zealand could rely on exceptions which allow specific countries to screen overseas investments in particular categories. NZ was allowed to set criteria for foreign investments in large business transactions, sensitive land, and fishing quotas which are specified in the Overseas Investment Act. 

National’s tax consultant said the so-called foreign buyer ‘tax’ could be implemented as a criteria for investing in land. This would mean it wasn’t legally a tax. 

Essentially, the law could be changed to make payment of a 15% fee part of the criteria for getting an investment approved by the Overseas Investment Office. 

To tax foreign home buyers a National-led government will first need to overturn a law banning foreigners from buying NZ homes introduced by the Labour-led government in 2018.

Can’t tax Korea

But even if it was considered to be tax, it would still be possible without breaching most of NZ’s trade agreements.

The consultant said four of the agreements included a non-discrimination obligation that applied to taxes paid on purchasing residential property. 

However, New Zealand had negotiated country-specific exceptions under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the United Kingdom, and European deals that explicitly entitled it to impose a tax.

The fourth free trade deal, with South Korea, does not include the exception and NZ would have to rely on the ‘not a tax’ argument to capture buyers from that country.

New Zealand’s trading partners could criticize this approach as stretching the interpretation of “criteria” too far and choose to challenge the rule. 

But the consultant said this was unlikely as these countries would have little incentive to criticize the Government for loosening its foreign investment rules. 

“In my view, such arguments do not have legal merit and, in any case, the fact that we would actually be liberalising by allowing investment (albeit subject to a fee) that has been heavily restricted since 2018 would logically make any complaint less likely from a practical perspective,” she wrote. 

She also disagreed with the Labour Party’s opinion that overturning the foreign buyers ban would be irreversible as NZ was allowed to screen some overseas investments.

“In other words, within the existing categories that may be screened, approval criteria may be added, taken away, or amended at any time”.

“This exception allows New Zealand to introduce payment of a fee as the relevant criteria for investment in residential property. It would also allow a future government to rescind the fee and reintroduce the more restrictive set of criteria that currently exist.”

Legal but implausible?

This legal advice, if correct, solves just one of three problems bugging the party’s foreign buyers ‘tax’ (or “charge” as Nicola Willis opted to call it in an interview on Sunday). 

Another problem is with double taxation treaties, which are tax agreements with other countries distinct from the free trade agreements.

Craig Elliffe, a professor of law and expert on cross border taxation, told TVNZ that half of New Zealand’s tax treaties included a non-discrimination clause. 

Those clauses would mean New Zealand couldn’t introduce a foreign buyers tax without raising the possibility of a legal challenge. It could also give trade partners the right to terminate double tax treaties, or even walk away from entire free trade agreements.  

Willis said the party had sought advice on this specific issue from Robin Oliver (another respected tax expert) who said it was possible without breaching the treaties.  However, Oliver warned there could be problems applying a non-resident tax to buyers from Australia, Austria, China, and Japan.

Even if a National Government was able to work through the complications and establish the tax, it is not clear how much revenue it would earn from it. The party has estimated the tax would bring in an average of $740 million each year, or just under $3 billion across the forecast period. 

Willis said the average sale price used in their model was $2.9 million in the first year and that fewer than 2,000 houses would need to be sold to meet the forecast. 

Corelogic data showed about 5,500 houses were sold for over $2 million in 2022 and roughly half that amount in 2023.

This would mean foreign buyers would have to make up a large chunk of the top end of the market for the revenue forecast to be reached.

Buyer bump

Nick Goodall, Corelogic’s head of research, said there were only 50,000 properties worth more than $2 million in the entire country.

Willis said that when National lifts the ban, fresh demand from foreign buyers will mean more transactions would occur in the “luxury end of the market” as a result.

Eric Crampton, an economist at the New Zealand Initiative, said it “wasn’t crazy” to assume there would be a lot of pent up demand for luxury houses in the first year or two. There may be foreign buyers who have been wanting to get in for years and other owners who have been wanting to sell a luxury vacation home but haven’t been able to. 

However, that wasn’t what National and its advisors Castalia had forecast to happen. 

“You’d expect the revenue projections to show a big hump at the start, when all that pent up demand flows though, and then decline over time. Instead, it had a slow increase in revenue over time — so, that was a little bit odd.” 

Crampton said National was struggling to fund tax cuts and was having to rely on “somewhat implausible” numbers from the online gambling tax to avoid making more spending cuts. 

Willis wouldn’t even entertain the idea that her tax revenue forecasts could be too optimistic. 

“We think that our estimates are cautious, and based on the pattern of purchases that have happened previously,” she told TVNZ.

When asked how she would deal with a shortfall in revenue, Willis said she was “not prepared to address a false hypothetical”.