Land bankers beware.

When the Government last week killed off the proposed expansion of capital gains tax, it overshadowed another announcement: that it intends to explore options for taxing vacant land, as a high priority.

As the Tax Working Group recommended, it will direct the Productivity Commission to include vacant land taxes in the inquiry it has under way into the funding and financing of local government. The Working Group thought such taxes were best levied at a local rather than a national level.


Even so, as a high priority the Government will also include in its normal tax policy work programme a review of the current rules for taxing "land speculators".

It will consider repealing the 10-year rule governing the taxation of gains arising from changes in land use regulation.

In its interim report, the Tax Working Group noted that in last year's Budget, Australia introduced a measure to deny deductions associated with holding vacant land. While not exactly a tax on vacant land, it does provide a tax incentive to utilise the land for either residential or commercial purposes.

But there is a problem with punting this issue into the Productivity Commission's well advanced inquiry into the much broader issue of how better to finance and fund local government. It is that the commission has already considered an idle land tax in an earlier inquiry in 2015.

And it was not keen on the idea.

The commission noted that such taxes were common in East Asia and parts of the developing world. But it cited research into the experience of 25 countries which concluded that such taxes were rarely effective, because of the difficulty of designing them and the administration costs.

Zoning changes are another way to encourage landowners to develop. Photo / File
Zoning changes are another way to encourage landowners to develop. Photo / File

If applied generally to idle land — however defined — the risk is that it would lead to token rather than substantial development in order to escape the tax, a risk also noted by the Tax Working Group.

If applied selectively, the commission said, the risk is that such powers would be used in an arbitrary and capricious way.


The owners of developable land have the choice between releasing it for development or holding on to it in anticipation of greater future returns.

"Where expected demand is high, or land is scarce, the incentives to hold land can be strong. Land banking is therefore a symptom, rather than a primary cause, of land supply shortages," the commission concluded.

An obvious strategy for combating the hoarding of land suitable for development is to reduce its scarcity value by committing to ensuring that zoning and servicing of land is responsive to demand.

In its 2015 report the commission also questioned the wisdom of the trend in recent decades for local authorities to switch from land value to capital value as the rating base.

"A capital value rating system taxes the improvements on land; so at the margin owners are discouraged from developing land or intensifying development on it. By contrast a land value rating system encourages land to flow to its highest value uses and, at the margin, discourages holding undeveloped land," it said.

Whether that is still the commission's view when it releases its draft report on local government funding and financing in June remains to be seen.

It is a fair bet that the report will favour increased use of targeted rates — the idea that when the value of property rises as a result of local government decisions on infrastructure development, some of the increase in value should be captured by the council.

In its submission to the current inquiry, Auckland Council says targeted rates discourage land banking because they raise the cost of holding undeveloped land. But it also acknowledges that targeted rates could push landowners to develop to a timeframe that might not be their preference.

Where targeted rates are applied to fund growth infrastructure, the council would like the ability to set a rate for more than one year at a time, providing future funding certainty.

And it wants the rates liability to be based on valuations which reflect the council's future commitment to infrastructure, as opposed to the use that land can be put to currently (the rules for rating valuation now require land to be valued on its best current use).

But the council also acknowledges some practical implications that would need to be managed, including the impact on existing residents who may be within a development area but may not have the ability or desire to develop their own property.

Regardless of what does or does not eventuate at the local government level, the Government last week also signalled that it would be adding taxing vacant land held by land bankers to Inland Revenue's tax policy work programme as a high priority.

And those officials' prospective workload has been greatly reduced by the decision to kill capital gains tax, not just for the time being but in a way that should prevent it from hanging around as a zombie policy risk.

That decision was the right outcome for our capital-shallow economy.

And it was for the right reason. This is a democracy and there isn't a majority in Parliament, or probably in the country, for a capital gains tax. At some point the Left has to take no for an answer, especially when it is the right answer.

But it leaves the Government on the defensive.

Labour and the Greens have long held, as an article of faith, that the absence of a capital gains tax has encouraged speculative investment in housing over productive investment in the kinds of businesses that employ people.

Given the monsoon bucketful of scorn and reproach dumped on the Government from adherents to that view since last Wednesday, the pressure to at least Do Something about hoarding land is liable to be intense.