Tax rule changes 'bad for business'

About 70 per cent of depreciation claimed in New Zealand is for non-residential property. Photo / NZ Herald

Budget depreciation rule changes could smack the multibillion-dollar commercial property sector with most of a $1.3 billion bill.

Connal Townsend, Property Council chief executive, said he feared the outcome for commercial landlords and businesses which owned their buildings.

Business costs would increase, foreign investors would be deterred and New Zealand would be on its own internationally if depreciation was axed on non-residential property investment, he predicted.

A Property Council-commissioned report warned of these outcomes if changes are announced this week.

The KPMG report said non-residential landlords would pay most of the $1.3 billion netted by changes to the tax rules because about 70 per cent of depreciation claimed in New Zealand was for non-residential property.

"The economic cost of removing depreciation on buildings will be borne primarily by the New Zealand business sector," KPMG's report said, predicting the result would be lower-quality buildings because of fewer incentives to reinvest in capital and possibly higher rents as landlords recovered lost tax deductions.

"The majority of our trading partners ... allow depreciation on some or all non-residential buildings. In the race to attract and keep capital, New Zealand would be at a significant disadvantage," KPMG said.

The council is New Zealand's main organisation for commercial, retail and industrial property consultants, managers and landlords who are responsible for real estate worth $24 billion.

Townsend said the changes were being discussed when the country was struggling to attract the capital and direct foreign investment it needs to make a full return to economic growth.

"Inland Revenue, in its dealings with Property Council on the matter, has all but admitted buildings do, in fact, depreciate. But the stark reality is the National Government badly wants to improve its current deficit," he said.

Townsend said if depreciation rules changed he hoped the Government would distinguish between the productive sector of property investment [industrial, retail and commercial property] and the unproductive sector [residential].

About 80 per cent of commercial property is owned directly by businesses and changing the rules would hurt the productive sector.

Analysts have cited the possible changes to retail, commercial and industrial property as damaging the fortunes of NZX-listed property trusts and companies which collectively own more than $6 billion of real estate.

But two Ernst & Young experts do not share these fears. John Schellekens, a real estate advisory partner, and Matthew Hanley, a corporate tax partner, doubt depreciation on all buildings will be axed.

"The decision to not allow commercial and industrial buildings to be depreciated would be a difficult one given it would misalign New Zealand with a number of other countries including Australia, would put considerable pressure on the capital/revenue boundary for determining deductible repairs and maintenance and would be inconsistent with past advice of tax policy officials," they said.

The Government has indicated property tax changes which the Ernst & Young experts said could mean change around when gains from property are taxable. An "elective regime" is most likely, they predict.

Building owners would be asked at the time of buying the property if the real estate would be held as an income or capital asset. Depreciation entitlements would be linked to this.

Budget possibilities:

* Axe depreciation on all property and increase PIE rate above 30 per cent.

* Axe depreciation with some provision for non-residential property.

* Leave depreciation unchanged.

- Source: Property Council of New Zealand

What government won't do:

* No comprehensive capital gains tax.

* No land tax introduced.

* No risk-free rate of return tax system.

- Source: Ernst & Young