Commercial building owners unhappy with looming loss of depreciation

Thursday, 31 August 2023

The loss of the ability to claim deductions on the depreciation of commercial buildings will endanger New Zealand’s built environment, the Property Council is warning.

National has announced that if elected it would end the commercial building depreciation tax break to help fund its new tax policy. It said doing so would generate about $525 million in revenue a year.

Labour has already said it would get rid of depreciation to fund its policy to scrap goods and services tax off fresh and frozen fruit and vegetables.

That meant depreciation was likely to go, whatever the outcome of the election, and that has left the Property Council “deeply concerned”.

Council chief executive Leonie Freeman said depreciation of commercial properties was critical for the future health of the country’s built environment.

Removing it was a raid on long-term maintenance funds for buildings, and increased the risk of rundown or even derelict buildings across the country, she said.

“If depreciation is removed, property owners tell us they will have to reprioritise expenditure, which when added to rising costs such as insurance, mortgage and property rate rises, will likely cause rent rises for businesses.”

National and Labour’s proposed policies came with a price tag of half a billion dollars for the property sector, but both parties failed to see the consequential impacts, she said.

“Removing depreciation will have flow on effects of aging buildings, a reduction of new projects in the development pipeline, and increased costs to businesses who occupy buildings.

“Without commercial and industrial buildings having access to depreciation, there is significant risk to forward investment. Put simply, less development in the pipeline.”

It could also lead to a deprivation of investment in buildings for important seismic strengthening upgrades.

Freeman said economic evidence from Inland Revenue indicated that commercial buildings did depreciate in value, and not being able to claim for depreciation loss concerned council members.

They believed it could cause the sector to lose its competitive edge, from an investor standpoint, against other developed countries in which property owners were able to depreciate their buildings, she said.

“It is disappointing that Labour and National have gone for a quick cash injection, rather than thinking through the consequences of removing depreciation.

“Access to depreciation allows for investment in the long-term maintenance and safety of our buildings. For New Zealand to have a sustainable and resilient built environment, it is critical that depreciation remains.”

If the winner of the election stood by its policy proposal post-election, it would not be the first time commercial property owners have lost depreciation.

Depreciation was allowed for residential and commercial buildings until 2010 when it was removed by Sir John Key’s National-led government.

But in 2020, the Labour-led Government reinstated it for commercial buildings as a Covid economic stimulus measure.

Deloitte tax partner Robyn Walker said at the time the return of depreciation was presented as permanent, and so to lose it would be worrying for many from a business perspective.

That was because after 2020 anyone who made a decision to purchase, upgrade, or seismically strengthen a commercial building would have factored depreciation into their calculations to make the numbers work, she said.

“Having depreciation deductions taken away from them means their numbers will no longer stack up in the way intended.

“Anyone in the process of building, or upgrading, will need to think about whether it still makes financial sense if they can’t get depreciation any more.”

The devil would be in the detail of any new rules in the space, but generally the move could have a cooling effect on the commercial property sector, she said.

New Zealand has 113,000 commercial buildings, and removing depreciation would impact on the ability of owners to manage their economic life cycle, Bayleys national director commercial Ryan Johnson.

It would slow down the cash component owners invested in the buildings and their upkeep, and commercial property pricing would also adjust minimally to reflect the loss, he said.

”I disagree with the way the life cycle of these buildings is being assessed, as they are used for business purposes as opposed to residential properties which people live in.

”There are also different considerations for depreciation around structure and fit-out, which need to be separated out.”

But depreciation was just one of 10 distinct financial factors that made investing in commercial buildings attractive, he said.