Ikea’s first New Zealand store, valued in the hundreds of millions of dollars, will be eligible for the Government’s “Investment Boost” tax deduction, despite being mostly built before the programme began.
Construction of the store began in June 2023.
Investment boost was the centrepiece of Budget 2025 and was widely promoted by the Government as an important means of attracting new investment to New Zealand. It applies to domestic and foreign investors.
The programme covers a wide range of business investments, including commercial property and allows an immediate 20% tax deduction, in the form of asset depreciation, for eligible investments.
In the case of commercial and industrial property, the scheme applies to new buildings including those underway at the time of the Budget (May 22), but not yet ready for use.
Deloitte tax partner Robyn Walker described the application of the investment boost to work already underway as a “lucky break” for those affected.
“The policy is aimed at attracting new investment, particularly overseas investment, so you could call it a windfall for companies like Ikea that already had their investments underway,” Walker said.
Walker noted that there is considerable value in simplicity for all businesses: “We do support this method for covering the transition period. The alternatives are too hard and cumbersome”.
Last year, the Swedish furniture giant put the investment cost of entering New Zealand at $407m, broken down across land purchase and the construction and fit-out of a single Auckland store, including site development.
Of that, its $41.4m Sylvia Park land purchase is not eligible for the tax deduction.
It isn’t clear exactly how much of the remaining investment qualifies for Investment Boost; store construction and much of the fit-out is covered, as are many areas of site works (including putting down building foundations and the likes of roads, fences, and retaining walls known as “hard standings”).
If the qualifying investment amounts to $200m to $300m, then Ikea will be able to immediately deduct $40m to $60m from its New Zealand taxable income, which is taxed at the 28% corporate rate.
This equates to saved tax owing of $11.2m to $16.8m; if taxable profit is initially low, the deduction can be used to create a tax loss and can be carried forward to offset future taxes.
So-called depreciation recovery rules apply to claw back the Investment Boost deduction if the Ikea building is ultimately sold for more than its depreciated value.
Before the budget, Inland Revenue Department (IRD) officials provided specific advice to underline for staffers of both Finance Minister Nicola Willis and Revenue Minister Simon Watts that new commercial buildings would be eligible for the Investment Boost deduction, so long as they came available for use on or after May 22.
“One widely known example of this is likely to be the Ikea store that is expected to open in Auckland in late 2025. Construction of the store is well underway and as it is a commercial building they would be entitled to Investment Boost based on the full cost of the store when the store becomes available for use,” the advice said.
Asked if it intends to make use of the scheme, an Ikea spokesperson said the company intends to follow the rules: “With any market entry, we work within the country’s rules, regulations, systems and processes.”
The company was currently focused on opening its store in Sylvia Park and setting up online shopping; there are no current expansion plans.
The store is scheduled to open on December 4.
Investment boost is expected to cost an average of $1.7b per annum in reduced revenue to the Government over the five-year period covered in the Budget.
Of that, an average $429m per annum is the cost of including commercial buildings in the scheme, an IRD spokeswoman confirmed.
Commercial property is not eligible for depreciation outside Investment Boost.
Willis told the Herald the scheme was designed to lift productivity and New Zealanders’ incomes and to encourage job creation. With that in mind, she said, it was “established to be simple to administer and easy to apply for”.
She said excluding assets already under construction when the scheme came into effect in May would have “led to the rules for assets being applied inconsistently and made administration of the scheme unnecessarily complex and unwieldy”.
IRD estimates the scheme will raise New Zealand’s GDP by 1% and lift wages by 1.5% over the next 20 years; it projects that half of these gains will be made in the next five years.
Labour’s finance spokesperson Barbara Edmonds declined to comment on the commercial property eligibility rules and has otherwise been broadly supportive of the new programme.
The Green Party has also been approached for comment.