The Labour Party is being warned that offsetting a tax break on fruit and vegetables via depreciation on commercial buildings could have hidden costs.
The party has proposed removing GST on fresh and frozen fruit and vegetables from April 1 if it is re-elected.
That would cost the Government $2.2 billion in foregone tax revenue over five years
Labour says that cost would be offset by getting more money from property owners.
That would be done by removing depreciation tax write-offs from commercial buildings, thereby making the owners pay more to the IRD.
But tax experts are concerned about this, saying it would change the rules of the property investment business part way through the game.
"People have made investment decisions based on there being depreciation on buildings," says Robyn Walker, tax partner at Deloitte New Zealand.
"Decisions are made on the basis of getting deductions over a period of 15 years, or whatever the duration of a loan is.
"(Changing the rules) would call into question whether the financial numbers will work any more."
Depreciation is routinely allowed as a tax reduction for business owners. This is done to allow a company to accrue enough money to replace assets when they wear out. Some items like computers are depreciated very quickly because of the fast rate of technological change.
The same principle was once applied to building owners, but it became very controversial as soaring property inflation pushed up the value of buildings in real terms.
At any rate, depreciation of buildings came to an end over a decade ago.
In 2010, the then National Government decided to end depreciation on buildings as part of a fiscally neutral "tax switch".
Lower corporate tax and higher GST were part of this move.
But critics argued this decision ignored the fact that the condition of commercial and industrial buildings declines over time. They can need to be replaced in 50 or more years because of wear and tear and because new technology can make them obsolete. In some cases, old buildings are so unusable they have to be demolished.
In the end, the Tax Working Group chaired by Michael Cullen recommended the Government consider restoring depreciation on buildings, as long as the fiscal conditions were right.
A process akin to that recommendation was undertaken by the current Government, which resurrected depreciation to give building owners some extra cash to tide them through the Covid crisis.
But the Prime Minister says that restoration of building depreciation was never supposed to last.
"That was a temporary measure that was introduced to get through Covid-19," Chris Hipkins says.
"Depreciation on commercial buildings was first removed by Bill English. It was reintroduced as an economic stimulus measure during Covid-19."
"We were pretty clear over the last 18 months or so that we were winding back all the Covid-19 measures and this was one of the last ones that we got to," Hipkins said.
The National Party is meanwhile staying aloof from this matter for now.
"We are having a look at that," says the party's finance spokesperson Nicola Willis.
"Obviously, it was National that removed that depreciation, so we do see a principled case for it. We do want to understand the impact, so we will be looking at it over the coming days to make our policy position final."
The Property Council, which represents large property owners, says it is not making any comment on this matter at present.
It is not clear how much money would be involved in ending depreciation on buildings. One expert estimated about $500 million more tax would have to be paid each year.
These costs would be passed on to commercial tenants and ultimately onto the people who buy the goods they produce.
More precise figures were issued by the Tax Working Group. It said restoring depreciation to commercial buildings would diminish state revenue by $880 million over five years. Doing the same thing to industrial buildings would cost $425 million over five years. And restoring depreciation to multi-unit residential buildings would cost $150 million over five years.
7 Comments
I'm a commercial property investor and I have been for a long time. If I recall correctly National removed depreciation from buildings at the same as they abolished stamp duty, so together these were more or less cashflow neutral.
Another point to make is that depreciation of buildings needs to be paid back at the time of the sale if it's sold at a capital gain, which it should be if you're a decent investor. So overall it's actually cash neutral. Some investors choose not to claim depreciation on their building so they don't need to pay multiple years of depreciaton back when they sell.
Correct; a big aspect of depreciation that people forget is it functionally becomes a timing issue in a lot of cases.
I generally can see an argument either way for it but the flow-on effect for back-end work for accounting purposes goes on for years after and if the changes are going to be made with each change of government then it would be good to see some consensus that this comes with an additional cost someone has to bear, not just the perhaps-foregone revenue at tax time and maybe tick tock changes aren't in everyone's best interests.
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