Depreciation deduction: Everything property owners need to know

The uncertainty brought about by Covid-19 has under-standably posed far more questions than answers for the property market.

Finance Minister Grant Robertson announced a significant fiscal package designed to help New Zealand get through the inevitable lull and establish strong foundations for recovery.

The package included the reintroduction of the depreciation deduction on commercial and industrial property, valued at $2.1bn. Here’s what that means for investors.

A smart move

This policy implementation will not have any immediate short-term impact on property owners as for most taxpayers, the first relevant tax year ends March 31, 2021. However, its impact on the future of New Zealand property should not be underestimated. The figures at an individual property level may appear small at first, but being able to claim tax relief against the value of a property structure at 2 per cent Diminishing

Value basis or 1 per cent Straight Line basis supports the investment case for new property development and investment in modern, quality commercial buildings.

Impact on investment

Here’s an example using the diminishing value method. An investor purchases a new-build industrial property for $60m, with a build cost of around $55m. Prior to the policy change, the investor could claim depreciation on fixtures and fittings (in this case, $1.66m) at the end of the first full tax year. But now with the new depreciation deduction, the investor can also claim on the building structure, which in this case would bring in an additional $680,000 of additional depreciation to claim.

Assuming a 28 per cent tax rate and post-outgoings effective rental income of $3m per annum (5 per cent of value), the pre-change tax bill would be $374,500 in year one.

Post government policy change, this bill reduces to $184,000 — a saving of 51 per cent or $190,000 on an investors’ tax bill.

The importance of sustaining longterm property development in New Zealand is paramount. It is vital that we keep looking to the future with policies like these to provide New Zealanders with best-in-class property in which to live, work, and play.

- Dale Winfield is JLL's New Zealand Head of Valuations and Advisory.