Lindsay Mayo: Taxed land can't get up and go, but money can

New Zealand's economy needs the exportable goods the farming sector provides. Photo / Ross White

Opinion

Brian Fallow gave an excellent overview on the tax working group's consideration of a widening of the New Zealand tax base.

The inclusion of property ownership as a taxable activity seems a key element in this.

Clearly, I am biased in my reaction, since much of my family investment is in land that we have owned for more than 20 years. I often say that I am an unusual Kiwi property investor, as my investment produces exportable goods, something that this country desperately needs to increase, to counter its alarming balance of payments deficit.

My perspective is that of an investor and a farmer, even though we no longer run our farm. It has been leased for the past decade; we ceased running it using a manager since the returns were often unsustainable. The rate of return we now receive is quite low but it is real, and my family prefers to keep the farm, and enjoy the occasional visit.

So what would be the effect on our land investment if a 1 per cent annual land tax is introduced? The answer is quite simple. It would push the return down to a level at which it would be no longer worth keeping.

Not only is the spectre of a land tax now confronting the farming industry, but it is also faced with carbon taxes, due to start in 2013. I am not aware of any other country that wants to impose carbon taxes on the production of food which is consumed mostly beyond its own boundaries.

Both these taxes will hit New Zealand's biggest foreign revenue earning industry, one which cannot increase its prices if its costs rise. So there is some quite bad financial news on the horizon for the farming sector.

Now undoubtedly, a majority of readers will be crying crocodile tears for me. "Poor fellow. His expensive bit of land will fall in value and will produce him less income."

Well, I'm not that concerned. I've already planned my strategy. Even if the land value falls almost 50 per cent I will still have a better income stream just by investing the proceeds in the Australian sharemarket. There are plenty of alternative investments, overseas.

If I act quickly enough and get in before values fall, I could be considerably better off financially. Although I don't think the current National Government is stupid enough to impose a flat land tax on rural land, there is always the possibility of a change of government, maybe not in two years' time, but certainly in five.

I hope that this sort of reaction is what the tax working group is trying to achieve. I doubt that I would be alone.

The group must want to divert investment away from productive activities within New Zealand and into foreign markets. The New Zealand sharemarket doesn't really have much depth, and other non-land investment opportunities are not very inviting either.

In reality, I'd be surprised if this is the sort of reaction that the tax working group, nor any sensible government, would want to achieve. Given New Zealand's pathetic balance of payments deficit and ever increasing foreign debt, it would seem sensible that taxation policies should be designed to encourage investment in activities that produce foreign income, even if they are traditional, unglamorous and not electronically hi-tech. The day of reckoning with our foreign debt is getting ever closer.

It might be argued that my reaction will, in fact, result in better use of capital, since farm values would fall, but the production would remain. However, the recent expansion of the dairy sector and its increased foreign income has required much additional capital.

Asset taxes will simply reduce the return on capital and divert it elsewhere. Has there even been a situation where increased taxes have resulted in greater production?

New Zealand has not yet found an adequate alternative source of foreign income to its land-based exports, and with its remoteness and its tiny population, it seems unlikely ever to do so.

The tax working group has received advice from Treasury and the IRD, and while there is conflict between the two, both will see merit in the potential of an increase in government revenue. That is only part of the outcome.

As this topic is considered further, what must be considered carefully is how investors will react. Theory and pragmatism often produce different results.

Brian Fallow is quite correct in saying that land can't be shifted overseas if it is hit by another tax, but he knows and states that capital is mobile. It will go wherever it produces the best return. If that is overseas, that's where it will go.

* Lindsay Mayo lives in Auckland, and is part owner of an engineering business. His family own a sheep and beef farm in Hawkes Bay.