Capital gains tax ‘brake’ on market
A comprehensive capital gains tax could cost the commercial property industry ‘‘billions a year’’, the Property Council of New Zealand warns.
The Tax Working Group’s final report has recommended a broad capital gains tax affecting a lot of property but not the family home.
‘‘If a capital gains tax is introduced, it could cost the sector hundreds of millions, then billions a year,’’ the council has has told its members in an advisory.
The advisory said a broad capital gains tax was recommended, but the key target would be land and buildings such as residential property investment and commercial, industrial and rural property.
The council represents more than 550 member companies who own more than $50 billion worth of property in New Zealand.
There were only a few limited recommendations that would help mitigate the effects of a capital gains tax on the commercial property industry.
One was that capital expenditure on the asset should be taxdeductible.
‘‘The group suggested reintroduction of depreciation would be a good idea but stopped short of specifically recommending it simply asking the Government to consider it if they can afford it,’’ the advisory said.
‘‘On balance, Property Council’s initial reaction to the report’s recommendations is that there is not enough in it for commercial property to mitigate the potential negative effects of capital gains tax.’’
The report said the cost of allowing owners of commercial, industrial and multi-unit buildings to depreciate buildings at a rate of 1 per cent would be $1.46b in the first five years.
‘‘Even if the Government decides not to reinstate deductions for building depreciation, there is a clear case to allow deductions in some form over time for seismic strengthening,’’ the working group said.
The capital gains tax would put ‘‘a brake’’ on commercial property sales and would penalise property upgrades, council chief executive Leonie Freeman said.
The council was looking for the Tax Working Group to recognise that the cost of doing business should not restrain businesses. ‘‘We think they have fallen short.’’
Commercial property housed most New Zealand businesses and was a key part of the country’s infrastructure, Freeman said.
‘‘It is important that the tax system encourages, not penalises, progressive upgrades to the buildings businesses work in,’’ she said.
‘‘Unless there are sensible rollover relief provisions, businesses may be penalised for trading up to new buildings.
‘‘The taxation of capital gains will effectively be a stamp duty, acting as a brake on market transactions.’’
This would mean lost opportunities for growth and lost productivity gains, Freeman said.
‘‘We would have liked to see a stronger recommendation from the TWG about reinstating depreciation on commercial buildings. It is a no-brainer from both a safety and a productivity perspective.
‘‘It is important to note the report is simply a set of recommendations to the Government. There is a difficult and lengthy political process to go through before any changes become law.’’
Deloitte partner Patrick Calman said: ‘‘I think you would be brave to put anything on this report until you have seen the reactions of Government.’’
The capital gains tax was a much bigger question for the Government than whether it reinstated depreciation on buildings, removed in 2010, he said.
‘‘It really comes back to: If the Government introduces capital gains tax and raises $8b, where does it want to spend it?
‘‘And all they are saying in this report is that one of the options you could consider spending it on is building depreciation.
‘‘It is important that the tax system encourages, not penalises, progressive upgrades to the buildings businesses work in.’’
Property Council chief executive Leonie Freeman
That’s the way I read it.’’
The Tax Working Group did acknowledge that buildings depreciated, but the key question was where that sat on the Government’s list of priorities.
The cost of offering depreciation for spending on seismic strengthening was not large – $70 million over five years. For depreciation on multi-unit dwellings it was $150m over five years.
Property guru Olly Newlands predicted owners would stop selling commercial properties once a capital gains tax was introduced, effectively ‘‘locking in’’ the market. That had been his experience in Australia.
He expected the recommendations to be watered down during negotiations within the coalition Government.