Are there annual property taxes in New Zealand?
If you're a property owner in New Zealand, council rates are a form of property tax that you are responsible for. These rates are an annual charge that contributes to local government revenue. It must not be confused with rental income tax, as council rates are chargeable regardless if you receive a rental income on your investment property. After mortgage expense (if any), council rates are probably the second largest expense on your cash flow statement as a property investor that can range from mid $1k to more than mid $3k (depending on regions) per property per year.
In this article, we'll discuss what council rates are, why they're important to property investors, when they should be paid, and how to make payment as a foreign investor. We'll also look at the correlation between council rates and property performance.
What are Council Rates?
Council rates are an annual fee that property owners in New Zealand pay to their local council. For example, a property owner with an Auckland property is to make rates contributions to the Auckland council, likewise, property owners with a Christchurch property make rates contributions to the Christchurch council. The rates contribute to local government revenue and are used to fund services and infrastructure such as roads, libraries, parks, and waste management. Since different councils have varying needs and services, the amount of council rates payable may differ from one location to another.
How do council determine the rates payable?
Local councils decide on the amount of revenue they aim to generate from rates and determine the means to achieve this goal. Rates are generally on a rise across NZ and the primary cause for the annual increase in rates is the rising expenses that local councils incur for providing services and maintaining and upgrading essential infrastructure.
The total funding requirements from rates are then distributed among properties within a council area based on the rateable value of each property.
What is Rateable value?
The amount of council rates you'll pay depends on the value of your property, as determined by the local council, known as rateable value (RV). The local council will then use your property's RV as a basis to calculate your payable rates. As a homeowner, you may come across two distinct values associated with your property - the rateable value and the market value. These values are not interchangeable and can differ by up to 50%. The rateable value does not necessarily reflect your property's true market value, it's primarily used by the council for the calculation of your yearly rates payable. RV is reassessed once every three years, with the last reassessment done in July 1, 2020 and the next due in 2023.
The council will assess the value of your property using a variety of factors, including the location (land value), and size and condition of your property (capital value). The value of improvements to your property is also taken into consideration for work done on the land, such as driveway improvements, landscaping, or another exterior improvements that increase the land’s value.
Eventually, how does the council calculate your RV and subsequently decide your rates contribution is probably less important to you as an investor, except to factor them as an expected expense when evaluating a potential investment property or to budget for them if you are already an NZ property owner. Unfortunately, there are no known hard & fast formulae that we can apply to calculate future council rates in advance for a property in question except for by estimation.
How much do I need to pay?
If you are in the mid of evaluating a property deal, the easiest way to estimate your rates payable is to check with the previous owner the amount they have been paying in the last 3 years, and budget an additional 5-15% (depending on region) to buffer any additional increase by the council over the next 3 years.
If the property deal is a turnkey property and is yet to be completed, the closest you can get in estimating your future rates payable is to look at what similar properties (in terms of size and location) in the area are paying, which can give a general idea of what to expect.
If you are already an NZ property owner, you should receive a rates notice from your local council each year, which will outline the amount you are required to pay.
You can check rates amount via a local council website
Source: https://ccc.govt.nz
You may visit the local council website and key in a property address to obtain the current rates payable as part of your research to budget for this expense. For example, on the Christchurch city council website, property owners or to be investors can enter home addresses into the search bar to see their current rates and any outstanding fees. Here are some useful links to council website across several locations:
It is important to remember that rates contributions may increase over time due to changes made by the local council, so it's always a good idea to budget percentage increases as good practice.
2021/2022 Median % rates increases across NZ main cities
Why are Council Rates Important to Property Investors?
While council rate is an expense and a cash outgoing for you as a property investor, they can be an important element to the whole property ecosystem. Council rates contribute to local government revenue, which is used to fund services and infrastructure that can benefit your property value. For example, if the local council invests in new parks, playgrounds, or public transport infrastructure in your area, this can increase the desirability of your property and potentially increase its value. On the other hand, if the local council neglects your area and doesn't invest in services or infrastructure, this can negatively impact your property's value. As such, the value of a property is often tied to the quality of the services and infrastructure available in the surrounding area. Good quality services and infrastructure can make a property more attractive to tenants and future buyers, while poor quality services can have the opposite effect. By paying council rates, property investors are contributing to the quality of the services and infrastructure in the area, which can ultimately benefit their investment. There is a correlation between council rates and property performance in New Zealand. Properties in areas with higher council rates tend to have higher values, as the rates contribute to the funding of local government services and infrastructure that can increase the desirability of the area in the long run.
In addition, understanding council rates is crucial for evaluating the total cost of ownership and estimating your cash flow as a property investor.
Should we avoid investing in areas with higher council rates?
Understanding council rates is crucial for evaluating the total cost of ownership and estimating your cash flow as a property investor. However, it should not be evaluated as a standalone factor when deciding which region to invest in. A property with higher council rates may even be more worth investing as compared to another one that may enjoy lower rates. From a cash flow perspective, a property that attracts a higher council rates is likely to attain a higher rent as well due to the desirability of the area. With a higher rent, it may even take a shorter time to cover this tax expense for you as an investor. This is to compare with say, a property in an area with lower council rates but a higher vacancy rate and lower rental income, potentially taking a much longer time to cover this tax expense from rent. Using council rates as a qualifying criteria to evaluate where I should invest in New Zealand is probably not high on my list when picking the right property, but more of an expense that I should be aware of to work out my overall projected cash flow.
When are Council Rates Paid?
Council rates are usually paid annually, although some councils may offer the option to pay in interest-free installments over 4 quarters, an arrangement I would strongly advocate to save on some interest cost on your bank deposit. However, do ensure that you have a direct debit setup to avoid any missed payments that may result in penalties.
The rates are charged in advance for the coming financial year, which runs from 1 July to 30 June.
How to pay?
If you are a Singaporean and your first foray into NZ property, your first rates payment will come through during the settlement of the property, a pro-rated amount depending on when it occurs during the financial year. It is usually payable together with the balance of your settlement monies and other expense to your lawyer who will advise on the exact figure. This first payment would cover you up till 30 June.
The most common way to pay is via online bank transfer or direct debit setup (aka giro) for automatic deductions
Thereafter, you will receive a rates invoice from the local council around July, mailed to your Singapore correspondence address. Inside it will outline the rates amount owed and the due date for payment. Payment can be made online via several methods offered. It is important to pay council rates on time to avoid unnecessary penalties and interest charges. This first mailer will normally also includes information on how to sign up for direct debit payment options from your bank account, which is extremely useful for a hassle-free payment process going forward. You can also opt for future invoices to be emailed to you, making it even easier to trace and manage your council rates payments from your email inbox.
In conclusion, paying council rates is an important responsibility for property owners in New Zealand. Council rates provide local government councils with a source of revenue to fund essential services and infrastructure, and for you, as a property investor, do note to budget for this outlay as part of your overall costs of owning a property in New Zealand.
What’s the best way to find out more? How can i get started?
If you are reading this, you are probably keen to explore and get started on the investment journey in the New Zealand property market.
Perhaps you are unfamiliar with New Zealand or perhaps you already owned property there and looking to scale? Will New Zealand market be a right fit for you and your family? Is this a good time to buy an overseas property, or should you wait and see?
Well, everyone’s situation is different. There is no one size fits all advice. What has worked for someone, may not necessarily work for you.
At Brickzwealth New Zealand, our aim is to bring clarity to your investment decisions with extensive on the ground experience for the overseas market.
Whether you are a first time property investor or a seasoned buyer with a portfolio, we are here to provide an honest and objective view to your investment journey.
We can help you by:
1) Providing Strategic property advice that best fit the outcome you desire
2) Identify & spot investment opportunities that align with your goals
3) Providing access to value-able partners in your investment journey with us
Besides the resources available on this website, the best way to get started is to kick-start a conversation with us today.
Invest differently. Inspire your future.
Ryan Quah
Founder
Brickzwealth New Zealand
