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Finance and
Performance Committee
20 November 2018
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Transfers
of land within the Council Group
File No.: CP2018/21037
Te take mō te pūrongo / Purpose of the report
1. To
provide advice on issues related to the ownership of waterfront land and
related assets and the implications of any potential transfers of ownership
within the council group.
Whakarāpopototanga matua / Executive summary
2. The
legal ownership of waterfront land and related assets such as wharf structures,
marinas, and investment properties currently sit with Panuku Development
Auckland (a CCO) and Ports of Auckland (a Council Organisation or CO) rather
than at parent (Auckland Council) level.
3. The
issue of legal ownership is a separate issue to the management and operational
use of the land. For example, roading assets are legally owned by Auckland
Council but managed and accounted for by Auckland Transport.
4. The
current ownership arrangements were put in place when Auckland Council was
established in 2010 and have not been reviewed since. These landholdings are of
high importance to the council for both financial and strategic reasons. These
landholdings are intended to play a key role in council progressing key
Auckland Plan 2050 outcomes in areas such as spatial development, planning,
environmental management and stakeholder relationships.
5. Although
not necessarily affecting day-to-day operations, direct legal ownership of
these landholdings by the council parent would provide another layer of control
over the medium to long-term use of these assets. On the other hand, direct
ownership means that any long-term risks or obligations in respect of these
landholdings also transfer to the council parent.
6. Tax
law is changing on 1 July 2019. One implication of this change is that after 1
July any transfer of land holdings from subsidiaries to parent cannot be made
without creating a substantial tax liability. While leaving the land holdings
unchanged for the foreseeable future is certainly an option, if there is an
appetite to transfer land to parent ownership for governance or strategic
reasons, then this should be considered before the new tax laws come into
effect.
7. Because
these land holdings are strategic assets, a transfer of ownership from CCO or
CO to the council parent can only be done via a Long-term Plan (LTP) amendment
and using the Special Consultative Procedure. As an LTP amendment this process
would require audit review and an audit opinion from the Auditor-General. To
enable transfers to be executed before 1 July 2019, practically speaking any
decision to undertake consultation on a proposal to transfer ownership would
need to be made by the end of this calendar year.
8. The
changing tax law is not a reason in and of itself to change legal ownership.
Rather, if the council considers that there may be good governance or strategic
benefits to hold these assets more centrally in the future, then acting now is
important to enable land to be transferred before 30 June 2019 to keep the
council’s long-term strategic options open.
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Ngā tūtohunga / Recommendation/s
That the Finance and
Performance Committee:
a) request
that the boards of Panuku Development Auckland and Ports of Auckland consider
the potential transfer of legal ownership of waterfront land and related
assets to the council parent
b) request
that staff include the respective positions of the Panuku Development
Auckland and Ports of Auckland Boards in a final report back to council in
December to enable a decision on whether to proceed to formal public
consultation.
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Horopaki / Context
9. The
waterfront land in Auckland’s city centre has long been identified as an
area of high strategic importance. In 2012, The Waterfront Plan defined a
vision for the waterfront as “a world-class destination that excites the
senses and celebrates our sea-loving Pacific culture and maritime history. It
supports commercially successful and innovative businesses and is a place for
all people, an area rich in character and activities that link people to the
city and the sea.”
10. The legal
ownership of waterfront land and related assets such as marinas, wharf
structures and investment properties currently sit with Panuku Development
Auckland (a CCO) and Ports of Auckland (a Council Organisation or CO) rather
than parent (Auckland Council) level.
11. The issue
of legal ownership is a separate issue to the management and operational use of
the land. For example, roading assets are legally owned by Auckland Council but
managed and accounted for by Auckland Transport. The
current ownership arrangements were put in place through the establishment
legislation when Auckland Council was formed in 2010 and have not been reviewed
since. The legislation did not provide any simple mechanism to change ownership
arrangements, so unless further legislative intervention is sought, any change
to subsidiary structures or asset holdings initiated by Auckland Council would
require a commercial transaction between legal entities in a similar way to the
private sector.
12. Under
these current arrangements, key decisions concerning waterfront and ports land
are not made directly by elected members of Auckland Council. The
accountability chain is provided by indirect measures such as:
(a) Shareholder approvals of
“major [financial] transactions” (Companies Act).
(b) Council
approval rights for strategic land / assets disposal (Significance and Engagement
Policy, and the Substantive CCO Accountability Policy).
(c) CCO / POAL board
appointments and removals.
(d) Statements of Intent (or
in the case of POAL, Statements of Corporate Intent).
13. The
specific assets that could potentially transfer are listed in the following
table and are located within the area shown in the map below.
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Current legal owner
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Asset
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Panuku Development Auckland
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Panuku waterfront land,
including investment properties
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Panuku wharf structures
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Panuku water rights
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Westhaven marina
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Other marina assets
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Ports of Auckland
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Ports of Auckland Land
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Ports of Auckland Wharf
Structures
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Ports of Auckland water rights
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The Ports of Auckland land and wharf holdings have a current
book valuation of $658 million and Panuku’s land, wharves, marina assets
and investment properties have book values of $740
million.
Tātaritanga me ngā tohutohu / Analysis and advice
14. While a
change of legal ownership within the group would not necessarily affect
day-to-day operations and would not change the level of public ownership, it
does present a range of implications which require careful consideration.
15. A
transfer of legal ownership of Ports of Auckland land holdings would involve a
lease arrangement between the council and Ports of Auckland to enable the port
to continue its operations. A transfer of legal ownership of Panuku Development
Auckland land holdings would involve a change in Panuku’s mandate to
allow them to manage these assets on the council’s behalf.
16. The
principal options here are to do nothing, transfer all of the assets referred
to in this report, or to transfer only some of these assets.
Governance implications
17. The
waterfront landholdings of Panuku and Ports of Auckland are of high importance
to the council for both financial and strategic reasons. These landholdings are
intended to play a key role in council progressing key Auckland Plan 2050
outcomes in areas such as spatial development, planning, environmental
management and stakeholder relationships.
18. Although
not necessarily affecting day-to-day operations, direct legal ownership of
these landholdings by the council parent would provide another layer of control
over the medium to long-term use of these assets. On the other hand, direct
ownership means that any long-term risks or obligations in respect of these
landholdings also transfer to the council parent.
19. Implementing
the change would require engagement with and approval of the boards of Panuku and
Ports of Auckland. Some minor consequential changes would also need to be made
to CCO and CO accountability policies and documents, including statements of
intent and corporate intent. For example, in the case of Panuku these documents
should make it clear that their role in managing property development at the
waterfront on council’s behalf would then become the same as their role
in the other Panuku development areas. There would also need to be some changes
to delegations to enable Panuku to carry out this role on council’s
behalf.
20. For the
purpose of preparing this report, council staff have engaged with the staff of
Panuku and Ports of Auckland. Staff and advisers of both organisations have
responded in an open and constructive manner. At the time of writing formal
engagement with their boards has not yet occurred, although we understand that
the board of Ports of Auckland are expected to discuss this matter at a meeting
on 19 November.
21. The use
of lease arrangements could lead to greater transparency and efficiency in the
use of land, as the subsidiaries would have an incentive to only use land that
they are willing to pay for.
Tax implications
22. Tax law
is changing on 1 July 2019. One implication of this change is that after 1 July
any transfer of land holdings from a CCO or CO to parent cannot be made without
creating a substantial tax liability. While leaving the land holdings unchanged
for the foreseeable future is certainly an option, if there is an appetite to
transfer land to parent ownership for governance or strategic reasons, then
this should be considered before the new tax laws come into effect.
23. Indicatively,
if all the land holdings referred to in this report were transferred at the
current book value of $1,398 million after 1 July 2019, then the potential tax
liability would be 28% percent of this value or $391 million.
24. External
tax advice on this matter has been obtained from PwC and is included as
Attachment A. To provide certainty of the actual tax treatment that Inland
Revenue will apply to any asset transfer, PwC recommend the council seeks a
binding ruling from Inland Revenue before executing any transfer.
Public consultation implications
25. Because
these land holdings are strategic assets, a transfer of ownership from CCO or
CO to the council parent can only be done via an LTP amendment and using the
Special Consultative Procedure. As an LTP amendment, this process would require
audit review and an audit opinion from the Auditor-General. To enable transfers
to be executed before 1 July 2019, practically speaking any decision to
undertake consultation on a proposal to transfer ownership would need to be
made by the end of this calendar year.
26. Once
waterfront landholdings are transferred to the council parent, under the
council’s current policies, the council could only make a decision on any
further changes to ownership and control of these assets by way of another LTP
amendment and using the Special Consultative Procedure. This provides for
additional political and public scrutiny over any future proposals to change
ownership or control of these strategic assets.
Implementation implications
27. Execution
of a potential transfer of legal ownership would require significant work,
including due diligence, transaction implementation, lease negotiations with
Ports of Auckland and engagement with the boards of Panuku and Ports of
Auckland.
28. The legal
due diligence would need to review the title of each asset and identify any
potential challenges to the proposal or any underlying land ownership issues.
Financial due diligence would include working with an external tax adviser to
seek a binding ruling from Inland Revenue.
29. While
some work will be done in-house, external legal, tax, audit, accounting and
valuation costs are likely to exceed $1 million if all of the assets discussed
in this report were transferred.
30. Given the
tight timelines, strong project management disciplines will need to be employed
to meet the deadline and manage delivery risks.
Financial and accounting implications
31. Because
any potential land transfers would occur within the council group, there should
not be any material financial implications at an overall group level, aside
from the transaction costs discussed above.
32. However,
there would be a range of accounting issues to be worked through for each
entity within the group. This would include a range of valuation and technical
accounting issues, including working through the impact the lower asset values
would have on the subsidiaries’ balance sheets.
Ngā whakaaweawe ā-rohe me ngā tirohanga a te
poari ā-rohe /
Local impacts and local board views
33. Despite
any potential transaction being internal to the council group the Waitematā
Local Board is likely to have views on the governance of these assets within
their board area.
34. If a
decision is made to proceed with consultation on ownership transfer, views of
all local boards will be sought to inform final decision-making.
Tauākī whakaaweawe Māori / Māori impact
statement
35. Despite
any potential transaction being internal to the council group the nature of the
assets involved will mean that local iwi groups have a particular focus on any
decision.
36. If a
decision is made to proceed with consultation on ownership transfer, engagement
with relevant groups will take place alongside other consultation activities
early in 2019.
Ngā ritenga ā-pūtea / Financial implications
37. The financial
implications are addressed in the body of the report.
Ngā raru tūpono / Risks
38. The key
risks are addressed in the body of the report. In general, transferring legal
ownership of assets within the group will not materially change the risk
profile of the group overall. It may however change the allocation of some risk
between specific entities within the group.
39. Given the
tight timelines, there are implementation risks that will need to be carefully
managed. There is a risk that a favourable binding ruling is not received from
Inland Revenue within the necessary timeframe. To some extent this can be
mitigated through good ongoing dialogue with Inland Revenue throughout the
process.
Ngā koringa ā-muri / Next steps
40. If the
recommendations of this report are agreed, staff will engage through Panuku
Development Auckland and Ports of Auckland executives to establish the
positions of their respective boards. Staff will report in December 2018 on the
positions of the boards and provide advice to support decisions on whether to
proceed to formal public consultation.
Ngā
tāpirihanga / Attachments
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No.
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Title
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Page
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a⇩ 
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Ownership of Strategic Land Assets - PwC Tax
Considerations Letter
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11
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Ngā kaihaina / Signatories
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Authors
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Ross Tucker - Acting General Manager, Financial
Strategy and Planning
Kevin Ramsay - General Manager Corporate Finance and
Property
Bram VanMelle - Manager Property and Commercial
Hinewairere Warren - Project Manager
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Authoriser
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Matthew Walker - Group Chief Financial Officer
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