Law Society says law change could further starve Auckland’s housing supply.

Lawyers are objecting to a planned tax law reform, saying it could stop overseas land and apartment developers working in the housing-starved Auckland market.

The Auckland District Law Society's property law commission has made a hard-hitting submission against the Government's planned tax change which applies a potentially punitive resident withholding tax to overseas-based traders who buy then sell within two years.

The new law is due to come into effect on July 1.

Joanna Pidgeon, society vice president and a committee member, said if people were trading property for gain they should pay tax whether they were from New Zealand or overseas. IRD could audit and capture unpaid tax from New Zealanders, but it was harder to collect this from people who were overseas, Pidgeon said.


North Shore-based lawyer Nick Kearney is particularly concerned, saying Auckland desperately needed overseas developers, but the new law could severely deter them.

"This could literally stop development in Auckland overnight. Developers will be scared and they will just hold the land," predicted Kearney, who has a number of Asian-based clients working here. "If overseas developers don't develop property, who's going to do it? We have always had foreign capital coming in and this country needs it."

Some businesses may be forced to change directorships or shareholdings and appoint New Zealanders, he predicted.

The society's property law committee said the Taxation (Residential Land Withholding Tax, GST on Online Services and Student Loans) Bill would be detrimental to offshore-based developers working in Auckland.

These developers created desperately-needed Auckland residential subdivisions yet the law change was aimed at them, the committee complained.

"The development of housing has been a topic du jour for some time and in effect the Government will be scoring an own-goal by failing to include an exemption for reputable offshore persons/developers," the society said.

Former Revenue Minister Todd McClay said the change was about fairness and was the third part of the Government's investment property tax reforms announced in the Budget.

"This measure will act as a collection mechanism for the new bright-line test, which applies to gains from the sale of residential property purchased on or after 1 October 2015 and sold within two years," McClay said.

"The RLWT [residential land withholding tax] proposal in the bill, together with the new bright-line test and changes to collect better tax information about buyers and sellers of residential property will help to ensure that everyone pays their fair share of tax on gains from property sales," he said.

Pidgeon is worried about apartment developers and land subdividers.

While the law would ensure foreign entities were held accountable for withholding tax its implementation could have a chilling effect on the market, she said.

"This will tie up their capital, which will delay the development of additional housing at a time when housing supply is urgently needed. There are many large, well established property developers who have been good taxpayers but who will be caught as offshore entities under this legislation," she predicted.

An entity is offshore even if one director or 25 per cent of its shareholders are overseas.

"They will have significant capital tied up pending completion of their tax returns, particularly as when assessing profits for calculation of the withholding tax no account is taken of expenditure, which in the case of subdivisions and apartment buildings is significant.

"It would be helpful to have an exemption for offshore taxpayers of good repute to ensure that this legislation does not clog their capital and impede development when it is desperately needed in Auckland. It is helpful to have a simple process for assessment, but adding either exemptions or bonds may soften a negative outcome from the legislation," Pidgeon said.

Tony Alexander, BNZ chief economist, says the three changes resulted in "a plethora of anecdotes - and nothing more than anecdotes - of Chinese offshore buyers pulling back from the Auckland market".

Government measures

• Moves against foreign property buyers announced in last year's Budget:
• Requirements for NZ bank account and IRD number.
• Capital gains bright-line test on investors selling in 2 years.
• Resident withholding tax on overseas owners buying and selling in 2 years.

See the property taxation submissions here: