Property industry to pay for Budget

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Thursday 20 May 2010

Bold changes set out in the Budget will primarily be funded through an effective tax increase for New Zealand property owners.

By The Landlord

Property Council chief executive Connal Townsend said while those reductions in the marginal tax rates are positive for the New Zealand economy, commercial property investors will help fund these changes by paying more tax.

"The Budget contains some positive results to improve New Zealand's national economic performance, but the cost of this unfairly falls on the property sector."

The most significant negative impact will be a change to disallow depreciation for a building's structure. Of equal concern are moves which could see rules changed to disallow depreciation on items such as building air conditioning systems which are currently depreciable as part of a building's fit-out.

Preliminary views from analysts believe the collective impact of tax changes on listed property could be a reduction in distributable earnings of between 4% and 7%.

Property Council National President Chris Gudgeon said the Council was very concerned about the Government's intention to review depreciation allowances for items of fit-out which clearly have an economic life significantly less than 50 years.

"This review has the potential to be a blatant tax grab which could create a significant disincentive to re-invest in commercial buildings, at the precise time when the Government needs to be incentivising refurbishment of existing buildings to reduce carbon emissions and maximise energy efficiency.

"Property Council looks forward to actively engaging with officials as part of that review. We have to ensure that the ability to claim depreciation for building systems for non-residential property is maintained."

Property Council has engaged with Inland Revenue and Treasury officials since February and provided them with compelling evidence that commercial buildings do depreciate. Removing the ability to claim depreciation effectively increases the tax charge on business.

Meanwhile Deloitte gives the Budget a D minus for its moves on depreciation and has described them as a backwards step, "especially for industrial buildings that reduce in value".

 "It is incomprehensible that the Government is moving to deny depreciation deductions on assets that reduce in value," tax partner Mike Shaw says.

Shaw, was a member of the Tax Working Group says the "minister deserves a D- for this measure."

"All this will achieve will be to reduce investment into this productive part of New Zealand's economy."  

The Tax Working Group did not obtain any information that the commercial and industrial sector was not paying its fair share in tax, hence the change is surprising, Shaw says.

In contrast, the removal of depreciation deductions for residential property investment is logical as the evidence presented to the Tax Working Group showed that these buildings do not depreciate. 

"The old policy was simply unfair, because property investors were able to claim losses against their personal income for assets that were actually improving in value. No other investment offered that tax advantage," Shaw says.

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