Property tax change will deter offshore investors, says group

New Zealand will become one of only a handful of OECD countries without the ability to write-down the value of buildings next year, cutting straight to the wealth of the commercial property sector. Photo / Colin Taylor

The Government's move to scrap depreciation on listed commercial property is "completely out of whack" with the rest of the OECD and may make it harder to attract offshore investment, the Property Council says.

New Zealand will become one of only a handful of OECD countries without the ability to write-down the value of buildings next year, which commercial property owners says will cut straight to the wealth of their sector.

"The rest of the world provides for it and we are now an outlier, a bit of an oddity and it makes it that much harder for us to attract offshore capital," council national president Chris Gudgeon said.

A New Zealand Institute of Economic Research report commissioned by the Property Council earlier this year shows Slovakia and the UK are the only other countries where depreciation tax breaks cannot be claimed, while in the Netherlands only limited rates can be claimed.

Currently property investors in New Zealand can claim annual depreciation of between 2 and 3 per cent of the purchase price of their building.

Building owners will still be able to claim deductions for repairs, maintenance and fitouts, not considered part of the building.

Building owners will be able to apply to Inland Revenue for a provisional depreciation rate if they consider a class of buildings has an estimated useful life of less than 50 years.

The Government said it would review the treatment of commercial fitouts and, if necessary, change the rules in coming months to address any uncertainty in this area.

The Property Council says the 4 - 7 per cent estimated fall in listed property earnings from the tax changes, was not a good message for offshore investors, who took depreciation as a given.

The changes would act as a disincentive to investment in buildings that supported the fabric of business, Gudgeon said.

"We can understand why they wanted to bring an end to speculation in the residential property sector. But did they have to clobber the listed commercial property sector at the same time?"

Property Council chief executive Connal Townsend said the Government had received compelling evidence that warned of the impact that disallowing depreciation would pose, but chose to ignore it.

The Tax Working Group recommended the commercial property industry should not be able to claim tax breaks, unless the industry could prove commercial buildings did depreciate.

Townsend said the property council gave the Government officials data which clearly showed commercial buildings did depreciate, but it was ignored.

Townsend said IRD estimated $1.3 billion a year could be raised if depreciation on buildings was disallowed and about 70 per cent of that, or $900 million, would come from non-residential buildings.

"It is clear that despite strong evidence that buildings do depreciate and the fact that the majority of countries in the OECD allow depreciation, the Government has considered the $900 million from non-residential buildings as a way to help fund other tax cuts."

"At the highest level it (the removal of depreciation) will slow the recovery of New Zealand economy following the recession," Townsend said.