Finance Minister Nicola Willis believes buildings go up in value over time, so depreciation deductibility shouldn't be allowed. Photo / Mark Mitchell
Finance Minister Nicola Willis believes buildings go up in value over time, so depreciation deductibility shouldn't be allowed. Photo / Mark Mitchell
OPINION
New Zealanders will be aware there is no such thing as a free tax cut.
This is especially so at a time when a new administration wants to deliver on promises it made voters before last year’s election, while returning the books to surplus in a sluggish economic environment.
Changes to the income tax system are expected to put a few more dollars in people’s pockets. Meanwhile, property investors will benefit from a reduction of the bright-line test and the phasing out of the interest limitation rule.
One of the groups to pay for these benefits is commercial and industrial building owners.
The Government plans to remove their abilities to deduct depreciation as an expense when paying tax from April 1.
The decision is a political win. The change will see the Government receive a decent amount of additional tax revenue ($575 million a year) for no real cost at the polls.
Your average person isn’t going to be too concerned about supposed fat cats who own office buildings, factories and retail spaces taking a hit to pay for their income tax cuts.
As for the minority exercised about the issue, which doesn’t exactly lead 6pm TV bulletins, where are they going to take their votes? To Labour - a party that allowed depreciation deductions in 2020, but then campaigned, in 2023, on stopping them again to cover the costs of its tax cuts?
Sure, the Government is under pressure to provide some relief to people doing it tough.
But its decision to ping building owners is short-sighted and contradicts chatter about it being committed to improving productivity and growing the economy.
It also flies in the face of Inland Revenue’s advice, which said the department was concerned disallowing depreciation deductions would distort the tax system and disproportionately affect businesses more reliant on commercial/industrial property.
A High Court case from 2019, when depreciation deductions weren’t allowed, sheds some light on how much disallowing deductions could cost a business.
The case between Mercury and Inland Revenue centred on whether Mercury’s geothermal turbines were “plant” or “buildings”.
The judge ruled in favour of Inland Revenue, which argued they were buildings, so were subject to a depreciation rate of 0 per cent.
The decision cost Mercury $7.4m in relation to a three-year period to 2015.
Whacking building owners with a tax hike at a time many are grappling with high interest rates is also a questionable call.
The portion of commercial property loans classed “non-performing” by banks is above that of other types of business and property loans.
Oyster Group, which has a big portfolio of properties tenanted by Government departments - Mitre 10, City Fitness and Kathmandu, among others - is under so much pressure, it’s trying to sell properties and suspending withdrawals by investors from the funds it manages.
One might assume property investors like Oyster will try to pass any tax hikes onto tenants, which would then try to pass them on to their customers - if they could.
Higher interest rates are weighing heavily on the economy, curbing people’s appetites to spend.
The situation is only exacerbating the Government’s fiscal woes. Indeed, its corporate tax take in the seven months to January was 11 per cent lower than a year earlier.
From this perspective, it would be in the Government’s interests to support building owners.
But again, we come back to this issue of trade-offs - or tax cuts coming at a cost.
Finance Minister Nicola Willis defended her decision to disallow depreciation deductions, saying the issue came down to whether you believed commercial and industrial buildings did in fact fall in value over time.
She referred to a Treasury study, which concluded they didn’t in the late 90s/early 2000s.
What she failed to mention was the study factored in the value of land buildings were on. And as we know, land in New Zealand tends to appreciate.
Inland Revenue said when the study was done, officials pointed out most international studies found buildings did depreciate.
Chartered Accountants Australia New Zealand agreed commercial and industrial buildings do in fact depreciate.
National Mini Storage chief executive Caroline Plowman said her company’s storage units lose value over their lives - roofs need replacing, walls need painting and security has to be updated, for example.
National Mini Storage units in Henderson, Auckland.
Nonetheless, she recognised that when buildings are newer, they may appreciate, before depreciating when they age.
Again, something has to give. The Government can’t give income earners and residential property investors tax relief, all the while returning the books to surplus within the next few years.
The question is, should a sector key to enhancing the economic and productivity growth New Zealand so desperately needs be the one to take the hit?
Looking beyond where we are in the economic cycle, the question is also whether we should undermine the integrity of our tax system - flip-flop on big issues and take stances contrary to the international norm - for the sake of vote-winning policies?
Just because previous governments also did this doesn’t make it right.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
