Need for new policy settings for building depreciation
In my last article I discussed the appointment of Michael Woodhouse, the former Minister of Police, as Minister of Revenue.
I concluded the article by observing that as our new Minister of Revenue swaps his truncheon for a pen and a calculator; he will find that there is plenty of work to do in the Revenue Portfolio.
One area among the many that needs thought is the policy settings for building depreciation.
As a recap, the depreciation rate for buildings was changed to 0 per cent as part of Budget 2010.
The official spin given for reducing the building depreciation rate to 0 per cent was to make our tax rules more neutral by recognising that allowing depreciation on long-lived buildings provides tax depreciation rates in excess of true economic deprecation rate.
In other words, on average, buildings had been increasing in value which does suggest that allowing a tax deduction for building depreciation was not appropriate – fair enough as a broad policy principal. However, on reflection, switching off all building depreciation is a blunt policy option that has some hidden side effects.
For example, by the same principal, if buildings do depreciate and the depreciation rate is less than the true economic rate, the owner of the asset is arguably over taxed.
In an article in 2015, I outlined why I thought owners of buildings may be over taxed when the building depreciates.
For many building owners who own properties that require significant earthquake strengthening following events in Canterbury, and the subsequent emphasis by central and local authorities on building standards, they will be well aware of the impact of these events on the value of their buildings.
In that article I made a case for a depreciation allowance for earthquake strengthening costs: such an allowance would provide a policy compromise and assist restoring neutrality to the taxation of buildings that have depreciated post the Canterbury earthquakes and subsequent developments in building standards.
I put this question to the thenMinister of Revenue, Todd McClay, during a visit to Invercargill in 2015, who suggested in reply that the question was probably better put to the Building and Housing Minister who is considering the matter in a broader context. Fair enough. However, when the Building and Housing Minister subsequently released the policy options for dealing with building codes, no mention was made of the tax considerations of earthquake strengthening.
While the minister’s announcements were very pragmatic, they did include a requirement that if an older building under 34 per cent of the building code is having a significant alteration or upgrade, then earthquake strengthening will need to be done.
As an aside, related to this matter is a suite of amendments made to our tax depreciation rules for buildings and plant and equipment to remove anomalies identified in the rules post the Canterbury earthquakes.
The general principal underpinning those changes was that the Government should not benefit in a tax sense from the events in Canterbury. Bringing this together, the policy outcome for owners of buildings that have depreciated following the emphasis on building standards is that these buildings may well now be over taxed, with no relief for the costs of bringing the buildings up to appropriate earthquake standards as required by the announcements made by the Building and Housing Minister. Provincial New Zealand is home to many fabulous old commercial buildings that are impacted, and Southland is no exception.
In my view it was a missed opportunity to not consider the tax issues associated with the earthquake strengthening of buildings and building code requirements in the package of measures announced by the Building and Housing Minister.
An appropriate tax policy compromise in this area may have addressed the issue of over taxation of such buildings and provided assistance to those faced with hard decisions to make.