How feasible is National’s plan to tax foreign property buyers?

Analysis - Tax experts and economists believe National's revenue projections from its foreign buyers tax are "optimistic" and have raised concerns on what it could do to New Zealand's international reputation.

National leader Christopher Luxon remains "confident" and the party has enlisted advice from legal experts and tax specialists. Meanwhile Labour is throwing everything it can at the policy around costings, and the potential it breaches New Zealand's double-tax agreements with other countries.

Before announcing the policy, National sought legal advice on whether imposing a tax could breach New Zealand's free trade agreements. It found there were enough carve-outs and exemptions to justify imposing the tax, in some cases by referring to it as a "fee".

But the advice made no mention of international tax treaties, prompting Labour to immediately go on the attack.

Overseas investment spokesperson David Parker pointed to the agreement New Zealand had with China. It contained a non-discrimination article which would exclude China from taxes of every kind and description, making National's income projections meaningless.

The policy was not as easy to digest as Labour's proposal to remove GST from fresh and frozen fruit and vegetables, which found economists and tax experts united in scorn.

RNZ has spoken to a number of tax experts and economists on the legality of what National is proposing, and its revenue projections.

National's advice

On Friday, two days after National announced the tax plan, it sought advice from OliverShaw director Robin Oliver.

He told RNZ it was a "very esoteric" area of tax law, but it was possible to impose the tax - as long as it hinged on residency, not nationality.

"I'll talk about the China treaty, which is as broad as we can get. It says you cannot discriminate on the basis of nationality. So how can you ensure that we can have this tax, while not contravening that provision? The answer is it's fine as long as it differentiates between people on the basis of their tax residency, not their nationality."

Essentially, in this case, a Chinese national who resides in China and purchases a property in New Zealand could be taxed. A Chinese national residing in New Zealand could not.

"You have a person living in New Zealand, subject to tax on their worldwide income in New Zealand, their home is here, their centre of vital interests, their family, their business is here, they pay tax here. They are therefore tax residents here. You cannot tax them under this tax simply because you've got a Chinese passport.

"But you can say if they're not residents here, because they only come here in and out, they're not paying tax in New Zealand on their worldwide income, you can distinguish on that."

This does, however, raise further questions on whether New Zealanders living overseas who are not tax residents here would have to pay the tax as well.

Revenue projections

National says the tax would raise, on average, $740m a year. Its modelling, reviewed and endorsed by consultancy firm Castalia, showed the revenue would increase each year for the next four years (starting at $715m in 2023-24, up to $764m by 2027-28).

New Zealand Initiative chief economist Eric Crampton told Morning Report that was surprising.

"You'd expect that in the revenue projections you'd have a big hump at the start when all that pent-up demand flows though, and then declining over time. Instead, we have a slow increase in revenue over time. So that was a little bit odd."

But Infometrics principal economist Brad Olsen said National's projections were plausible.

"Although you might well have a bit of pent-up demand, you might also have the difficulties of actually implementing it straight away. So questions around the legality and similar might mean that that a few more people are a bit more reluctant to jump in immediately."

However, he also said the projections were optimistic.

"I do think, looking through the figures, it's an optimistic level of revenue to be collecting, given how much there have been changes in the housing market, and given we don't know what the current level of interest is from foreign buyers to buy in New Zealand."

National argued the policy would actually be liberalising, as it allowed people back into a market they have been shut out of since 2018.

Baucher Consulting tax specialist Terry Baucher was not so sure.

"If we're saying this could open up overseas investors into funding some of these new buy-to-rent developments and expansion of housing, new housing for example... then that's something that is definitely liberalising and would be a benefit.

"But if we're just shuffling existing stock, I'm not sold on the idea. You can accept it's liberalising, but I'm not sold on the idea that's actually investment."

Reputational risk

Baucher questioned even if the tax treaties were worked around, what kind of message it could send.

"We're seen as an honest broker in all of this. We're very rules-based, that's always been a part of our foreign policy - that we very strictly applied rules-based approach to agreements. So something where we are seen to be trying to work our way around existing obligations, might not be viewed very favourably.

"This whole thing shows the barriers we're running up against around not having a capital gains tax, not having taxation through estate and gift duties, and particularly having a very tax-preferred asset class in property. And so we want revenue. But we are basically saying, 'Well, we're not prepared to tax ourselves, but we'll tax foreigners.' Not sure that sends a great image, and from a tax policy perspective, I don't think particularly great tax policy."

Crampton agreed it was a reputational risk.

"Looking for loopholes through that isn't a particularly good look for a small trading country that depends on international rules-based orders," he said.

There is, of course, one big Winston Peters-shaped snag in the plan. New Zealand First wants to keep the ban in place, and will fight tooth-and-nail to get its way.

If National needs its help to form a government, it will face much more obstinate opposition than they are getting from a few economists and tax experts.