Depreciation: Here today, gone tomorrow

In a move flagged earlier this year to head off the prospect of the unpopular capital gains tax, Finance Minister Bill English told Parliament "allowing tax deductions for depreciation provides an unfair tax advantage for [building] assets."

From tomorrow, the existing 20% loading of depreciation will be cut for new buildings, while existing properties with a life span of 50 years or more will brought in from April next year.

"This allowance explicitly departed from the principle of allowing deductions for true economic depreciation," he said. "It results in other taxpayers effectively supporting investments that might to stand up on their own merits."

The move is part of the government's wider tax package and is forecast to net an additional $3.1 billion in revenue over the next four years, and is expected to lift tenants' rents 1.4% above projected increases over the next three to five years.

English said he was reluctant to make "abrupt changes" to the property sector, given its importance to New Zealand investors.

Building owners will still be able to claim deductions for repairs and maintenance on their properties, and for so-called ‘fit outs' that aren't considered part of the building.

The Inland Revenue Department will review the treatment of commercial ‘fit outs' and amend the rules if needed. Building owners will be able to apply for a provisional depreciation rate if they think a class of building has a useful life of less than 50 years.

Commercial property investors, including AMP Capital Investors and ING Property Trust, have aired their concern about the proposed changes to depreciation, saying residential investors, for whom the proposals were meant to be targeted, only make up about a quarter of depreciation claims. Listed property trusts have had a turgid year as the recession sapped demand for office space and saw tenants exit the major cities' central business districts.

Still, there are signs property developers are beginning to show interest in new projects again, particularly in the industrial sector, which tends to lead recoveries, according to the Reserve Bank's latest financial stability report.