Homes worth over $2 million would be taxed under National's foreign buyers plans. Photo / Fiona Goodall
Since the National Party unveiled its tax policy a week ago, it has faced intense scrutiny over whether its plans to pay for the plan stack up.
The $14.6 billion scheme is meant to be fiscally neutral. That means the money the Crown loses in taxation is paid for by spending cuts or tax increases, meaning there is no net loss to the Crown.
Of the $14.6b cost, $6.26b comes from four new taxes, including charging more for visas, the ending of commercial building depreciation, tightening the rules around online gambling, and taxing foreign buyers 15 per cent on the purchase of homes over $2m.
The last two taxes have come under scrutiny, firstly for potentially being impossible to implement and second, for the unrealistically high revenue National expects from them, even if they are possible.
The stakes are very high. National expects the gambling changes to raise $716 million over the four-year forecast period, and it expects to get $2.95b from the foreign buyers’ tax - the single biggest source of funding for the tax cuts.
If it is wrong, one of three things could happen: it could be forced to drop one of its promised tax cuts, breaking a promise to voters; it could be forced to cut further spending to afford its tax cuts, also breaking a promise to voters; or it could be forced to borrow more money to afford the cuts.
This last option is the most likely. There’s not much wrong with a little bit of borrowing to fund tax cuts if you really think the economy needs them. In 2008, John Key ran on a promise of allowing borrowing to rise 2 percentage points of GDP higher than Labour had promised in order to fund infrastructure and tax cuts he argued were essential.
But this is not 2008. In our high-inflation environment, borrowing to fund tax cuts is just about the worst thing you could do. It would throw fuel on the inflation fire. Any additional income from a tax cut would risk being chewed up by higher inflation and bills.
The stakes couldn’t be higher. Either the plan works, or National has to choose between breaking its key election promise or sacrificing its economic credibility to deliver debt-financed tax cuts.
Elsewhere, the Herald has looked at the revenue assumptions of the plan. In some cases, these are fairly heroic. Here, we examine whether the revenue tools are possible within New Zealand’s international tax and trade obligations.
It is complicated stuff. Many people contacted for this story politely declined to give their view on the issue, citing the niche complexity of international trade and tax agreements. The dispute is being fought in a hotly contested area that only a handful of people can claim to fully understand.
The foreign buyers ban
Thanks to a law change made in 2018, non-resident foreign buyers cannot buy existing homes. There are exemptions. Investors can invest in new-builds. Australians and Singaporeans are also exempt, thanks to existing trade deals. New Zealand citizens living overseas are obviously exempt, as are non-citizens who live here - anyone holding a resident visa who has been living in New Zealand for at least a year including at least 183 days in the past year can buy a home.
The ban is not perfect. Recent complaints have included those of people moving to New Zealand for essential work who have to put-off buying a home here until they meet the eligibility criteria.
National’s plan
National would keep the foreign buyers ban for homes worth less than $2m, but lift it for homes over that threshold. Those homes would be subject to a 15 per cent tax. Australians and Singaporeans would be excluded.
Labour’s problem with National’s plan
Labour has raised several problems with the ban’s legality. Mainly that it would breach a host of tax and trade agreements we have with other countries like China. This would mean excluding dozens of countries from the tax, making it unworkable.
Labour’s David Parker, the author of the original ban, and a former trade and revenue minister, claims as much as 60 per cent of the revenue from the tax would collapse after countries covered by double-tax agreements were excluded from the tax.
Auckland University Professor Craig Elliffe, who specialises in tax law, wrote in an analysis piece for TVNZ the plan might be impossible to implement for the countries in which New Zealand has a double-tax agreement with.
Most of these agreements have a “non-discrimination” article, which essentially asks that countries signed up to the agreement do not use the tax system in a way that discriminates against people from that particular country. Egregious examples of this occurred in the past. In the 19th century, for example, New Zealand passed a “poll tax” on Chinese migrants, a blatant form of discrimination.
In the modern context, double tax agreements are meant to stop governments from raiding the pockets of foreign nationals who live and work in each other’s countries, and ensuring a level-playing field for businesses.
Elliffe wrote that taxation “imposed based on tax residence” would be unlikely to breach these agreements; however, he argued that National’s proposed tax is based on nationality rather than residence.
“It appears that residence is not the basis for determining this taxation. Instead, it is based purely on nationality and would be more burdensome as a tax obligation than that imposed on New Zealand nationals. It applies to people who do not hold a resident class visa in New Zealand, something [neither] New Zealanders, nor I believe Australian citizens, are required to do,” he wrote.
For the very strongest double-tax agreements, like the one New Zealand has with China, this means that a country cannot discriminate with any kind of tax, be it income tax or a capital gains tax.
The rebuttal
The rebuttal hinges on how we think about residents, who the tax can discriminate against, and nationals, who we cannot.
OliverShaw director and former IRD Deputy Commissioner Robin Oliver told the Herald his reading of National’s tax plan was that it discriminates based on residence, rather than nationality - and is therefore compatible with the double tax agreements.
National’s tax policy works a bit like the foreign buyer ban itself.
Take the example of a Chinese buyer as China is protected by one of New Zealand’s strongest double-tax agreements. A Chinese buyer, resident in China, would be hit by the tax because they are not resident in New Zealand.
If they come to New Zealand and are resident here, they would not be hit by the tax because it excludes New Zealand residents, regardless of their nationality.
On that interpretation National’s tax complies with those treaty obligations.
“We cannot discriminate on the basis of your citizenship, what passport you have,” Oliver said.
“It comes down to this central question: You’ve got a person living here in New Zealand who is tax resident in New Zealand paying tax on their worldwide income like everybody else... they are the tax resident here and [if] we impose this tax on them only because they have a Chinese passport - no, you can’t do it,” Oliver said.
There is a fishhook, which is the exemption granted to New Zealand citizens wherever they are resident. A New Zealand citizen resident in China could buy a property without triggering the tax, a Chinese citizen resident in China could not.
This has the potential to be a bit of a nightmare, with National possibly needing to hit New Zealand citizens resident overseas with a 15 per cent stamp duty on any house they buy.
But Oliver thinks this is the exemption for New Zealand citizens, regardless of where they are resident.
“The fact you are exempting other people doesn’t alter that scenario,” Oliver said.
He went back to the example of a Chinese passport holder, resident in New Zealand and protected under the Chinese agreement.
“A person living in New Zealand, resident here, they are taxed on the basis that they have a Chinese passport, that is discriminatory.
“If they are taxed on the basis that they are not resident here, that is fine. If we give exemptions elsewhere, it does not alter the discriminatory nature of the tax,” he said.
Elliffe did not respond to requests to comment on his position. Other tax experts spoken to for this story could not speak on the record, citing conflicts with clients. They were evenly split between Elliffe and Oliver’s positions, respecting both as leaders in the field.
Trade agreements
Another problem to consider is whether the tax breaches any of New Zealand’s free trade agreements.
Despite being called a “tax” by National, the party’s own legal advice thinks that the policy may “not be considered formally a tax” from the perspective of international trade obligations.
In this case, New Zealand’s Free Trade Agreements (FTA) become more relevant. These are similar to the tax agreements in that they are designed to ensure fair treatment for people and businesses in either country. They ideally try to reduce a country’s ability to discriminate against other nations, but in practice, carry many exclusions.
National’s legal advice noted that relevant FTAs, including RCEP, CPTPP, UK and the EU agreements allowed New Zealand to keep its existing foreign investment screening regime, which is run out of the Overseas Investment Office (OIO).
The FTAs did not overturn or erode the powers of the OIO, despite their intention to encourage foreign investment into New Zealand.
The advice considered that in many cases a 15 per cent “fee” could be inserted into the OIO process as a criteria or condition for investment, without breaching the rules of the FTA.
What we cannot do is add additional kinds of investment to the OIO system. We cannot wake up one day and place additional tariffs on the European Union investing in
National’s advice also found that most of these agreements included a section, specific to New Zealand that allowed the Government to ratchet up and ratchet down its rules on property investment as it sees fit.
That means National could repeal the foreign buyers ban and Labour could reinstate it if it wished to.
The CPTPP, for example, says New Zealand “reserves the right to adopt or maintain any taxation measure with respect to the sale, purchase or transfer of residential property (including interests that arise via leases, financing and profit sharing arrangements, and acquisition of interests in enterprises that own residential property)”.
National’s advice says the exception “clearly gives New Zealand the policy space to impose a tax on the transfer of property”.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Expectations tempered around return to surplus in 2027/28.