Tax change will push up rents, says report

The report advocates a distinction between residential and commercial property. Photo / Herald on Sunday

Rents on investment property will rise and buildings will deteriorate if the Government axes building depreciation tax claims, says a KPMG report commissioned by the Property Council.

The report opposes Government reform based on the Tax Working Group's report.

KPMG said non-residential landlords would pay most of the $1.3 billion netted by changes to the tax rules because about 70 per cent of depreciation claimed in New Zealand was for non-residential property.

"The economic cost of removing depreciation on buildings will be borne primarily by the New Zealand business sector," it said, predicting the result would be lower-quality infrastructure because of fewer incentives to reinvest in capital and possibly higher rents as landlords recovered lost tax deductions.

"Neither will be a particularly desirable outcome. New Zealand would be an outlier internationally. The majority of our trading partners ... allow depreciation on some or all non-residential buildings. In the race to attract and keep capital, New Zealand would be at a significant disadvantage," KPMG said.

The council is New Zealand's main organisation for commercial, retail and industrial property consultants, managers and landlords who are responsible for real estate worth $24 billion.

KPMG said since the late 1970s, commercial and industrial buildings have depreciated at 2-4 per cent annually.

Prime Minister John Key yesterday ruled out a capital gains tax, land tax and the risk-free rate of return method of taxing income but said the system would change. Landlords were one target and changes would be announced in May's Budget.

KPMG said the tax working group's building depreciation recommendations appeared to be aimed at addressing shortcomings in residential rental housing tax. The consultants urged that to be the target, not bigger investment property.

"If there is an issue with the taxation treatment of rental housing, this should be addressed as a specific targeted measure. We note, for example, that some other jurisdictions differentiate between residential and non-residential buildings, allowing tax depreciation only on the latter.

"We believe a clear distinction needs to be drawn between the residential rental sector and the commercial and industrial property sector ... In contrast to residential rental property owners, we understand the commercial and industrial property sector is a net tax payer and contributor to the New Zealand economy.

"Unfortunately, the perception is that all buildings should be included in the scope of any depreciation change. This is not helped by the fiscal implications being based not only on removing depreciation on residential rental properties, but all buildings.

"This seems an illogical leap from the solution the group appears to be recommending to a very narrow problem," KPMG said.

Shamubeel Eaqub of NZIER wrote a paper for the council saying New Zealand would be unusual internationally if it axed building depreciation.

"This could hamper already weak foreign direct investment into New Zealand, the health of the local capital market and erode export competitiveness.

"This is clearly counter to government policy objectives of making New Zealand a more internationally competitive economy and would place us at a further disadvantage to Australia," Eaqub wrote.

Property investors would be severely penalised.

"Depreciation is a non-cash expense for businesses, which spreads capital expense over the life of the investment. The effect of depreciation is to reduce the tax burden, by reducing the taxable income by the depreciation amount, and lift after-tax cash income.

"Removing depreciation on buildings would lift the effective corporate tax rate from 30 per cent to 32 per cent. Removing all depreciation, not just on buildings, would lift the effective corporate tax rate to 42 per cent," Eaqub wrote.

He estimated the removal of commercial building depreciation would levy large costs on New Zealand business of around $1 billion annually.

* Full copies of the KPMG and NZIER reports at www.nzproperty.co.nz.