Lobbying to stop National’s proposed building tax hike for commercial and industrial buildings

A lobbying effort is already underway to prevent the incoming Government from advancing a proposal to tax commercial and industrial building owners half a billion dollars more a year.

Both National and Labour campaigned before the election on removing the ability of commercial and industrial building owners to deduct depreciation as an expense when paying tax.

Both parties saw their proposals, which largely flew under the public’s radar, as instrumental ways of helping fund their proposed tax cuts.

Indeed, National expected the change to generate $2.1 billion over four years — enough to pay for the tax cut it proposed to give residential property investors by once again allowing them to write off interest as an expense when paying tax.

Speaking to the Herald, Deloitte tax partner Robyn Walker said National’s proposal to reinstate interest deductions, but prevent depreciation deductions, was inconsistent.

She argued it didn’t make sense because building depreciation was widely understood (including by the Tax Working Group the Jacinda Ardern-led government set up) to be a real cost of doing business.

Removing depreciation deductibility would mean commercial and industrial building owners paying more than $500 million of additional tax a year. Photo / Alyse Wright

She said many buildings, like metalworks, airport terminals, medical centres, port buildings, cool stores, factory premises and smelters, had specific uses and finite lives.

Walker, who also advises the Corporate Taxpayers Group, said the National-led Government should carve out these buildings and allow owners to continue claiming depreciation.

Depreciation deductions were disallowed under National in 2010, then allowed under Labour in 2020. While the change was made to support businesses in the face of Covid-19, it was deemed permanent.

“The Tax Working Group produced data suggesting that not allowing a deduction was part of the reason New Zealand imposed the highest corporate marginal effective tax rates for manufacturing plants across OECD countries in 2015,” Walker said.

“Disallowing depreciation deductions would increase black-hole expenditure, discouraging investment and distorting investment decisions.”

Walker also worried that fluctuating tax settings would undermine the predictability needed for building owners to make long-term investments.

While National’s fiscal plan is heavily reliant on disallowing depreciation deductions, the change isn’t on the agendas of its potential coalition partners — Act and NZ First.

Act is proposing to get the Government’s books out of the red by cutting expenditure, including by slashing jobs in the public sector, closing departments and stopping corporate welfare.

Meanwhile, NZ First has a policy to “increase the rates of depreciation for agriculture, manufacturing, research and development”.

Both Act and NZ First also want to delay the implementation of costly changes to the income tax system, fearing that giving people big income tax cuts now could exacerbate inflation.

Nonetheless, both Act and NZ First, like National, believe residential property investors should be able to deduct interest as an expense.

Walker said if the incoming Government decided to target commercial and industrial building owners in a bid to generate revenue, it could at least allow depreciation deductions to be claimed in the year of the building being sold, if the owner suffered a loss.

She noted the Tax Working Group also suggested the Government could allow depreciation deductions on a partial basis for seismic strengthening.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.