An apartment investor with a $185,000 property could lose around $1,000 a year from their tax rebate if possible amendments to annual tax deductions are made. It appears 'highly likely that the net effect of various proposed changes to be made to depreciation rates will be lower tax rebates' says Mr Whitburn. In an officials' issues paper, amendments considered likely to be adopted include reducing building depreciation rates by 25% (from 4% down to 3%). It seems that the Government may believe that there is a bias towards residential housing as an investment over other investments, and that the proposed adjustments to depreciation rates will go some way to balance the scales.
We have modelled some figures from recent Chattels Apportionments and found 'the proposed changes will take money out of the pockets of property investors but the investors affected the most will be apartment and new development owners.'
Property Tax rebate reduction (Annual Estimated)
$280,000 House $600
$280,000 New House $1,100
$185,000 New Apartment $1,000
Fortunately for property investors, the proposals seem nowhere near as drastic as previously reported. The proposals and their effects will impact on short term cashflow but are not likely to have a significant impact on long term investors.
The proposals do hit property investors in three main ways:
Lowers the depreciation rate for buildings: Treasury and Inland Revenue believe from further detailed economic analyses, these are the actual economic depreciation rates that the depreciation rate for building structures is overly generous. The current allowance is for claiming depreciation at 3% on a straight-line (SL) basis or 4% on a diminishing value (DV) basis. They propose the rates for building structure to be dropped to 2% SL or 3% DV.
Raised concerns over the effect of depreciation split-outs. The Inland Revenue propose to slightly lower the depreciation rates on separately identifiable assets, to reduce depreciation claims by investors arguing these deductions 'create' too much benefit for investors. They are particularly concerned that two investors could have very similar rental properties yet have many thousands of dollars difference from a depreciation apportionment alone.
'The IRD would like to see items such as non-load bearing walls, plumbing, cabling, ducting, in-built furniture and fittings all depreciated as part of the building structure.'
The key question will be whether an asset is a separately identifiable asset, or merely a component of a much larger structure (ie. the building).
It has been proposed that there is a legislative schedule of components that are seen to form the core part of the building (similar to Australia's 'list' of building depreciation deductions). An independent chattels valuation would then be required for the listed assets on both purchase and sale to get the deductions for separately identifiable assets. Alternatively it is proposed that investors can simply elect to depreciate everything at the new lower building structure rate.
Proposed to change the loading on all new assets, but this is unlikely to have major effects on most investors. The current flat rate of a 20% loading to add to depreciation rates for new assets is to be better aligned to the economic life of the asset. This means that assets with shorter lives will have higher than the current loading rates, and assets with longer lives will have lower loading rates.
The Issues Paper by Treasury and the Inland Revenue also considered other matters such as denying depreciation deductions in full, denying repairs and maintenance deductions and denying or limiting interest deductions. Investors will be breathing far more easily as a result of these changes being discarded. As a result New Zealand is still a property investment friendly country.
David Whitburn LL.B BSc - Director of Hybrid Chattels Appraisals Limited
David Whitburn's knowledge and skills in the field of depreciation and chattels appraisals comes from a combination of his passion for property investment, his tertiary qualifications and his hands on experience . He has worked over the past ten years with leading chartered accountancy firm Deloitte, leading law firm Russell McVeagh, and property investment advisors The Hybrid Group. David is also a successful property investor in his own right.
David can be contacted on (09) 638-3350
********************************************************************************
Disclaimer: Whilst we have endeavoured to provide you with quality and complete information, we cannot guarantee its accuracy and hereby disclaim any liability from acting or failing to act upon the information that we have supplied you with. We advise you to undertake your own due diligence before proceeding with any purchase of property
Search
