Tax boost for property owners
Thousands of building owners of commercial and industrial properties will receive a boost worth hundreds of thousands of dollars from changes to tax included in the Government’s $12.1 billion emergency stimulus package to combat the impact of the coronavirus pandemic, a leading valuer says.
As part of the $2.8b support package for business, the Government has reintroduced building depreciation deduction claims for property owners with commercial and industrial properties, at a level of 2 per cent a year, starting in April, director of valuation services for Bayleys Valuations, John Freeman, said.
The business relief measure comes after tax deductions for depreciation on building structures were removed in the 2011-2012 tax year. New deduction claims would also be available for earthquake strengthening.
Freeman said commercial property owners would welcome the announcement as a substantial boost to their operating balance sheets. ‘‘The good news is that it seems the reintroduction of these is permanent.
‘‘In addition, the Government has indicated that new deduction claims will be available for seismic strengthening costs at 2 per cent a year as part of this latest move. Again, for a lot of property owners these sums
Last year, the Tax Working Group in its final report estimated the reinstatement of tax deductions for commercial and industrial buildings at only 1 per cent annual rate would cost the Government are substantial.’’ $880 million for commercial buildings and $450m for industrial over five years, so the 2 per cent deduction could cost about $2.6b.
The Property Council, representing owners owning about $50 billion of commercial, industrial and retail assets, has been advocating for the end of the controversial depreciation rules, most recently during the debate over a capital gains tax.
‘‘Our members are very pleased to see depreciation deductions for commercial and industrial buildings reinstated, a policy change that we have called for since depreciation was removed in 2010,’’ Property Council chief executive Leonie Freeman said. During the capital gains debate and consultation, Inland Revenue advised the Tax Working group that there was good evidence in international studies that buildings did depreciate, that commercial and industrial buildings depreciated faster than other types of residential buildings, and that in not allowing depreciation for tax that New Zealand was out of step with most other developed countries.
John Freeman gave the example of a purchaser buying a $3m commercial or industrial property, whose value comprised $600,000 for the land (for which depreciation cannot be claimed), plus $1.5m for the building and $900,000 worth of fit-out.
Until the end of the current 2019-2020 tax year, depreciation deductions could only be claimed on the $900,000 building fit-out, typically at a rate of 10-12 per cent, depending on the nature of the fitout, providing a benefit about $100,000, Freeman said.
However, from April under the Government’s announcement, owners would also be able to claim 2 per cent a year for depreciation of the $1.5m building.
This would add a further $30,000 a year and take total benefits to $130,000 a year for every year they continued to own the property.
‘‘In some cases, our clients are considering property purchases worth tens of millions.
‘‘Those purchases will be eligible for six-figure tax depreciation claims.’’
It was important for property owners to seek independent, expert advice from valuation specialists who can accurately value depreciable assets, Freeman said.