An advocate for New Zealand’s property industry says both Labour and National have failed to see the consequential impacts of their proposed policies to remove depreciation for non-residential buildings.
Property Council New Zealand chief executive Leonie Freeman said depreciation was critical for the future health of New Zealand’s built environment.
“The proposed policies to remove depreciation are a raid on long-term maintenance funds for New Zealand’s buildings, running the risk of rundown or even derelict buildings across the country,” Freeman 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 certainly cause rent rises for businesses placing more cost pressures on businesses.”
The proposed policies will come with a price tag of half a billion dollars for the property sector, the Property Council said.
And the property sector was already facing significant challenges, Freeman said.
“Removing depreciation will have flow-on effects of ageing buildings, a reduction of new projects in the development pipeline, and increased costs to businesses that occupy buildings,” Freeman said.
“Without commercial and industrial buildings having access to depreciation, there is a significant risk to forward investment. Put simply, less development in the pipeline.
“It will place another challenge on our road to sustainability by making it much harder to maintain and upgrade our buildings,” she added.
In announcing its tax policy two weeks ago, Labour said it would be funding changes – which were headlined by the removal of GST from fruit and vegetables – by removing the “last remaining large Covid-19 economic stimulus measure” - depreciation for non-residential buildings to support commercial property owners through the pandemic.
Meanwhile National said today that tax hikes included $525 million on average per year from ending the commercial building depreciation tax break.
“It is disappointing that both Labour and National have gone for a quick cash injection, rather than thinking through the consequences of removing depreciation,” Freeman said.
Deloitte tax partner Robyn Walker also opposed changing the rules.
She said there was agreement within the tax community that buildings do in fact depreciate, so this should be allowed to be deducted as an expense.
There was also economic evidence from Inland Revenue, said the Property Council.
“Our members are concerned this will cause the New Zealand commercial property sector to lose its competitive edge from an investor standpoint against other developed countries, in which property owners are able to depreciate their buildings,” Freeman said.
Freeman said both parties have been inconsistent on the depreciation of commercial buildings.
“Previous indications from the Labour-led Government were that depreciation was introduced as a permanent measure, and the property sector planned future developments based on this premise,” she said.
“The National Party has also announced that depreciation would be extended to residential properties, namely Build to Rent if elected.
“These inconsistencies create uncertainty in a market that is already facing significant challenges.”
The removal of tax breaks for depreciation of commercial property was “disappointing”, said Craig Elliffe, Director of the Master of Taxation Programme at Auckland Law School.
“Buildings do actually depreciate. So that is just convenient politics and not very good tax policy.”
National also hopes to garner $740m from a 15 per cent foreign buyer tax on the purchase of houses worth over $2m, $179m on average a year from taxing online gambling and $123m on average per year from moving to user-pays immigration levies, excluding tourist visas.
Elliffe said the other three revenue raisers were interesting in that there was a consistent theme targeting non-residents rather than residents, he said.
“Non-residents don’t vote. I don’t want to be cynical, but it kind of is a bit.”
Collecting the tax from international online gambling operators made sense but collecting the revenue from that sector would be very difficult, he said.
The foreign-buyers tax was likely to be behavioural rather than revenue raising, he said.
“It’s very much designed to suppress demand and force prices to fall. That was the case when British Columbia introduced it in Vancouver. It was because they had a red-hot property market,” he said. “I don’t think that behavioural change is in the mix the way it would have been if it had been imposed three or four years ago.
“I think that could be a very soft number. By my numbers at $740 million [revenue] you need to sell $5 billion worth of property.”
That was about 4 per cent of the total revenue of $128b value of property sold annually across New Zealand, he said. “Maybe that’s doable. But I don’t know.”
Nick Goodall, head of research at CoreLogic NZ, said its data showed there were 2600 houses sold over $2m in the year to June 2023. If 5 per cent of those were bought by foreigners and an average purchase price of $2.5m was assumed the tax raised would be $50m - a long way short of the $740m.
Goodall said the change in policy to allow foreign buyers to buy properties over $2m could encourage more investors if they saw New Zealand as a safe haven place to invest.
He said some would see it as being attractive if they could buy a property and only had to hold on to it for two years before they were able to sell it with no capital gains tax and only a 15 per cent tax to pay.
But it could have flow-on impacts to areas like Auckland and Queenstown if properties were bought and then left empty, putting more pressure on the market.