Tax relief of more than $1 billion a year for building owners possible

Monday, 24 September 2018

More than $1 billion of tax relief each year for building owners is on the table if the Tax Working Group recommends and the Government accepts that depreciation on buildings should be allowed again.

New Zealand abolished depreciation deductions for buildings with a useful life of 50 years and more in the 2010 Budget and that took effect from 2012.

Depreciation is still available for buildings with a useful life of less than 50 years.

But the TWG 'is considering whether there is a case to reinstate depreciation deductions for certain types of buildings', its interim report released last week said.

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Buildings types caught by the 2010 Budget no-depreciation rule are industrial, commercial, multi-unit residential and other residential.

If depreciation deductions were allowed again, the loss in tax revenue was estimated to be a total of $1.27 billion in the 2020-21 year, growing to $1.5b in the 2024-25 year for those four building types at a 3 per cent depreciation rate.

It might have to be phased in given the substantial cost to the Government, the interim report said.

'As noted in Chapter 8 on Housing affordability, the restoration of depreciation on multi-unit residential buildings could support the Government's housing affordability goals by increasing the supply of housing and supporting greater intensification in urban areas,' the interim report said.

There might also be a case to reinstate depreciation deductions for commercial and industrial buildings which depreciated faster than other types of residential buildings, the interim report said.

The TWG questioned why no deductions were allowed for spending on seismic strengthening because deductions might be claimed if a building collapsed in an earthquake but not on spending to prevent the building from collapsing.

'The group is still considering its position on this issue, but it does seem to be an area where tax policy is working counter to the Government's disaster risk management agenda.'

A paper on the Depreciation of Buildings, prepared by Policy and Strategy at Inland Revenue for TWG, concluded that international studies consistently showed buildings did depreciate though evidence for the rate of depreciation was mixed ranging from 1 per cent to 9.9 per cent generally.

New Zealand was among only a few Organisation for Economic Co-operation and Development (OECD) countries along with Singapore and the United Kingdom not allowing depreciation deductions for commercial and industrial buildings.

Property Council of New Zealand chief executive Connal Townsend said TWG had listened to the commercial property sector and recognised commercial property depreciated at a greater rate than other property.

The TWG considering reversing the no-deprecitation rules was 'massive' for property owners and particularly for the big commercial property owners like Precinct Properties, Goodman Property Trust and Kiwi Property.

'Our position is that depreciation should be restored. There was never any rational judgement for abolishing it. For any other form of infrastructure you would provide depreciation.'

He said the property industry was 'stupefied' when the Government abolished depreciation on buildings in 2010.

The argument for it was 'largely facile'.

'It boiled down to the Government of the day wanting to give tax cuts,' Townsend said.

Most of the extra revenue it gathered was generated by commercial property rather than residential.

'We were simply expected to take one for the team. The view was you are going to get a tax cut anyway.'

When it came into effect it was not catastrophic but it had a chilling effect on commercial property investment, Townsend said.

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