National’s foreign buyer tax plan continued to unravel yesterday.
Now, it appears the party sought some crucial advice only after it had launched the policy.
Meanwhile, National has now released some of the initial legal advice it received despite leader Chris Luxon earlier saying they would not release it.
That may indicate that the party is feeling the pressure of a barrage of criticism of its proposals.
The core of that criticism is that many of New Zealand’s 40 Double Taxation agreements do not allow the Government to discriminate against taxpayers based on their nationality.
However, it appears National initially sought advice only on whether introducing a foreign buyers’ tax would conflict with the country’s free trade agreements.
The party released that advice yesterday from well-known trade lawyer and consultant Tracey Epps.
She was responding to a request from National’s Trade spokesperson Todd McClay, which indicated that by August 25, National had already decided to go ahead with a “foreign buyer tax” that would apply to “overseas persons” seeking Overseas Investment Office approval to purchase “residential land.”
“You have advised that you plan to set the fee at a specified percentage of the property’s purchase price, with applications under the OIA to purchase residential property being automatically approved upon payment of the fee,” she replied to McClay.
“The fee would not be imposed on Singaporean or Australian buyers.”
It would seem that McClay’s mind was already made up before he sought Epps’ advice but nevertheless her conclusion was straightforward.
“Ultimately, whether the proposed fee is or is not a tax, the conclusion is the same. New Zealand has policy space under its FTAs to charge a fee on purchases of residential property by overseas persons,” she said.
That was correct. But only as far as it went.
She did not comment on the 40 Double Taxation Agreements (DTAs), which are separate documents negotiated by the Inland Revenue Department.
National appears to have taken them into account only after it went public with its “Backpocket Boost” on Wednesday, which heavily relies on foreign buyer tax income to fund the proposed tax cuts.
However, National has also provided journalists with a summary of advice on DTAs, which it received from tax expert Robin Oliver, obviously after it made its proposal public.
In his note, Oliver indicated that he was responding to comments made by University of Auckland Law professor Craig Elliffe, who is also the author of “International and Cross-Border Taxation in New Zealand.”
He has told reporters he only spoke to National on Friday.
He said National’s proposal was unlikely to be able to be put in place with many of the countries that have a DTA with New Zealand because those agreements banned taxation discrimination on the grounds of nationality.
Instead, he suggested that taxation imposed based on tax residence was unlikely to be problematic.
Oliver took up Elliffe’s residency idea and said the model OECD DTA did not prevent NZ from taxing tax residents of other countries when NZ tax residents were not taxed.
“You can discriminate on the basis of residence but not nationality,” he said.
But National’s campaign chair, Chris Bishop, yesterday appeared to contest that sequence of events.
“We’ve been working on this for a number of weeks and months, actually, and all of the different ramifications of it when it comes to the foreign buyer levy, when it comes to the gambling tax, there has been a lot of work gone into it and a lot of consultation with the experience and legal experience as well in relation to it,” he told Breakfast TV.
Bishop maintained that the proposal would not break any double taxation agreements.
“Look, what we’re doing is no different to what many other states and countries do. So British Columbia and Canada, for example, levy a 20% charge on foreign purchases of real estate in British Columbia. That is what they do. That is what we are going to do,” he said.
But that is not strictly true. British Columbia did levy a tax on non-residents, but since the beginning of the year, Canada has banned all sales of residential land to foreigners.
When British Columbia introduced the foreign buyer surtax, sales of luxury homes – the ones National wants to target — initially fell from five per cent of all sales to 3.6 per cent and continued to decline to one per cent of the total market last year.
The foreign buyer ban was originally proposed by National as a revenue raiser.
In its estimates of the savings it would get from cutting government expenses added to the revenue from new taxes, the foreign buyers’ ban was projected to make up 20 per cent of the overall total through to 2028-29.
The tax was forecast to bring in between $715 and $764 million a year.
That projection was obviously based on the assumption that all foreign buyers by nationality who bought houses over $2 million would have to pay it.
But if those buyers were to stay in New Zealand for more than 183 days, regardless of their immigration status, they would become residents for the purposes of the Inland Revenue Act and, therefore, not subject to the tax.
The idea that the buyers National might be talking about might come and stay here for protracted periods appeared to be on Luxon’s mind yesterday.
He has begun to promote the lifting of the ban on foreign house sales as a way of attracting people who might make investments here.
“This is a good proposal and a good plan,” he said yesterday in Napier.
“I just want to remind you, why are we doing this?
“New Zealand is the most restrictive country in the OECD, the developed world, around foreign direct investment.
“Many businesses in this region would actually like to have a partner or some talent whether it’s in technology, whether it’s in a business that actually comes in from overseas bringing in talent and bringing in capital, and one of the things that those owners can’t do is actually buy property in New Zealand.
“So, we’re saying you’ve got to buy a property above $2 million.”
In saying that, Luxon has thrown the emphasis back on the lifting of the ban on foreign buyers rather than on the revenue-raising possibilities of the tax.
But that then raises the question of where National is going to get the money to fund its “Backpocket Boost.”
That is how far this issue has unravelled so far.
