Tax measures may extend to commercial sector - expert

Geof Nightingale. Photo / Supplied

Commercial and industrial property owners cannot be confident that new property tax measures in next week's Budget will be restricted to residential rental properties, according to Geof Nightingale, a partner with PricewaterhouseCoopers and member of the Victoria University Tax Working Group.

In the latest issue of Bayleys Total Property publication, Nightingale says it is widely anticipated that building depreciation will be eliminated to at least some extent in the Budget, but this alone will not make up the balance of revenue needed to fund the tax rate cuts. "Therefore, it appears likely additional changes to property tax will be necessary."

Nightingale says it remains to be seen what impact the tax changes will have on property values. "In isolation any tax increase could be expected to reduce values. However, that may not be the actual real-world outcome. Examples exist that suggest property values would not respond in the same way in practice, as in theory.

"For example, local body rates, which are in effect just a land tax, have increased faster than the rate of inflation for a number of years but that has not seemed to dampen property values."

Nightingale says the Tax Working Group's report on potential changes to the tax system included a number of new property taxes which were suggested because the tax system relies too heavily on income taxes. In response to the report, the Government announced that the Budget on May 20 will contain a package of tax reforms," he says.

"However, the Government expressly ruled out a land tax and a 'risk-free rate of return' (RFRM) method for residential rental property, which were advised for consideration by the Tax Working Group as well as a 'comprehensive' capital gains tax.

"But it did signal the Budget package will include significant tax changes for property."

"Having dismissed land tax and RFRM, Nightingale speculated that the Government may be considering some of the following options:

1. Removing depreciation on buildings entirely or only for certain classes of building e.g. residential rental buildings. Alternatively, owners of specialised buildings, such as industrial complexes, could apply for the ability to claim depreciation.

2. Limited capital gains tax - All investment property could be subject to tax on gains, or arbitrary tests could be introduced, such as any building sold within two years of purchase becomes subject to tax. Or depreciation could be optional, but in the event of an "opt-in", any gains would be taxable.

3. Ring fence property tax losses - Property deductions such as interest and depreciation could only be carried forward against future rental income and not be set off against other taxable income.

4. Restrictions on interest deductions for property - Limit the deductions for interest to a notional level of debt to equity (say 40 per cent debt).

"The final package could include one or more of these options," Nightingale says.