Court ruling on Auckland Councils reverse engineered bed tax could cost millions

A tourism group says Auckland Council may have to pay back tens of millions of dollars to accommodation providers after the Court of Appeal ruled that a targeted rate on them was invalid.

The council and its ratepayers also face significant court costs after a damning judgment found it had “reverse engineered” justification for the scheme.

The rate imposed on hotels and other accommodation providers was pushed hard by Mayor Phil Goff, who wanted an alternative to direct ratepayer funding for the tourism promotion and major event work of what was Ateed (now Auckland Unlimited).

It was projected to rake in $26.9 million in the 2017/2018 year but this was cut in half following an outcry by the accommodation sector. The industry argued that it would be solely funding tourism and event promotion but not getting anywhere near the full benefit of that work.

Initially, the burden fell on 236 providers whose rates doubled in some cases. The rate imposed in 2018/2019 was extended to informal accommodation providers using platforms such as Airbnb – and then suspended due to the Covid-19 outbreak in 2020.

The Court of Appeal found the council did not have the power to target visitors directly through a bed tax or visitor levy.

Its judgment said there was “virtually no assessment” from the council on the benefit to the targeted group. “The council’s failure to adequately consider this mandatory relevant consideration was an error of law going to the heart of the decision,” the judgment said.

“Given the significance of this error to the rating decision in both years, we consider it impeached the validity of these decisions.”

The court found the council undertook virtually no assessment of the benefit to the targeted group or how the benefit of the funded activity was distributed across other groups of ratepayers and the wider Auckland community.

“This was fundamentally because the assessment was carried out at the end of the process to reverse engineer a justification for a scheme that had been formulated without regard to the statutory criteria.”

Before it was introduced, it was estimated that the rate could add up to $10 a night to a hotel bill.

An Auckland Council spokesperson said last night that it was “currently reviewing” the court’s decision and would not comment on whether it would appeal.

The group Commercial Accommodation Rate Payers (CARP) says it is delighted with the court finding, which overturned a decision of the High Court.

“We suspect that council may well appeal to the Supreme Court given the mayor’s previous statements. Given that the tourism and accommodation industries have yet to recover from the pandemic and council’s finances are stretched, we hope that common sense prevails and that they don’t,” said Carp steering committee chair Terry Ngan.

“As ratepayers, we would rather the mayor and council channel their efforts into working with industry on a solution that not only reflects the Court of Appeal’s decision, but is fair and equitable to all concerned at an appropriate time.”

The appeal court said the issue of “consequential relief” would be determined by the High Court if the parties could not agree.

Tourism Industry Aotearoa (TIA) has long fought against the rate and its chief executive Chris Roberts said, depending on how much the council collected, the total could be $27m.

The correct figure has been sought from the council, as has comment on what alternative funding arrangement could be put in place for Auckland Unlimited.

TIA led a 2017 campaign opposing the rate proposal, which came close to defeating the idea, with Auckland Councillors voting 12-10 to proceed with a watered-down version.

“It was hugely disappointing when this poorly conceived rate was imposed,” said Roberts. “Congratulations to the small group of owners who took this court action and have finally achieved a just outcome for Auckland’s accommodation sector.”

Smiles on faces

Hospitality New Zealand said the ruling on theAccommodation Provider Targeted Rate (APTR) comes at a vital time for an industry suffering greatly as a result of extended lockdowns in the city.

“This will put smiles on a lot of accommodation business owners’ faces that haven’t had a lot to smile about for 18 months,” said Hospitality NZ chief executive Julie White.

“It’s significant, and not just for Auckland businesses. Accommodation providers and other industries across the country will also be breathing a sigh of relief because this had the potential to be picked up by other councils,” she said.

“It’s now clear, as reflected in numerous submissions to Auckland Council and initial consultations Hospitality NZ members were extensively engaged in over the past five years, that the mechanism for raising funds for tourism in Auckland was not fair to the accommodation sector.”

There were very limited benefits for operators, and the court had recognised that, she said.

Councils were forced to look at this targeted rate to fund tourism in their cities because the industry was so underfunded.

“Now the rates issue is off the table, central government will need to step up and look at how our once-biggest money earner [tourism] can come back from Covid and rebuild with a fair funding mechanism both industry and the Government are part of,” said White.

“It’s imperative the industry is involved in the design of the funding mechanism to bring back tourism back to pre-Covid levels and stronger.

“Operators continue to suffer greatly, with many still on their knees, and the recovery will be long. For some it will be three to five years before they get back to where they were before Covid, so we need solutions, and fast.”

Wider ramifications

Hotel Council Aotearoa (HCA) strategic director James Doolan said the decision had implications for other business sectors as well, since it addresses what should be taken into account when local authorities seek to impose new targeted rates on industry subsectors.

“The court’s ruling is consistent with HCA’s own submission to Auckland Council in March 2021, calling for the APTR to be permanently removed.We ask Auckland Council to give accommodation providers some much-needed certainty by now moving quickly to implement the Court of Appeal’s decision.

“The issue of tourism infrastructure funding is complex and nuanced and the HCA had sympathy for Auckland Council’s funding constraints, even though the rate was clearly a poor response,” he said.

Since its formation in 2020, HCA has consistently and repeatedly called on local authorities such as Auckland Council and Queenstown Lakes District Council, and on central government, to work collaboratively with HCA and other key tourism stakeholders on agreeing principles for a fair, reasonable and nationally-endorsed funding model for tourism.

“Any new funding regime must draw upon international best practice and robust research.Tourism is an internationally competitive undertaking. The fundamental tourism funding problem has not changed in the four years since the APTR was introduced,” Doolan said.

Central government now needed to do more for the tourism sector, which before Covid-19 vied with dairy as New Zealand’s biggest overseas funds earner. It generated almost $3.9 billion annually in GST revenue plus an estimated $3.1b in additional tourism-related taxes such as PAYE, profits tax and excise taxes.

“Central Government’s tax take from tourism is not fully reinvested in the sector, nor is it adequately shared with local authorities to support investment in essential infrastructure.As a result, New Zealanders get frustrated with overcrowding and local authorities have turned to novel fundraising techniques, such as the APTR, to fill the funding gap.”

Doolan said international and domestic tourists already “pay their way” in New Zealand and the 15 per centGST is imposed on international tourists without exceptions or rebates.

That 15 per cent was substantially higher than the total sales taxes plus bed taxes paid in almost all comparable destinations worldwide. Australia imposes GST of only 10 per cent and does not have a bed tax.

“For so long as international tourists do not get a vote, cash-strapped central government and local authority politicians will be tempted to introduce new rates, taxes and charges designed to selectively target tourists and tourism businesses,” he said.

“Tourism and hospitality businesses have made significant sacrifices since borders closed in March 2020. Tourism industry organisations – including HCA – remain ready and willing to engage with government on real and lasting solutions to the national tourism funding problem.”

New solutions should be implemented with reasonable timelines.

Doolan said it was hoped that future consultation with industry was genuine and conducted in good faith.

“The last thing New Zealand’s tourism industry needs now is further tick-box consultation exercises after ‘in principle’ decisions have already been taken by regulators.”

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