Depreciation on Commercial Property in NZ

With the New Zealand election wrapping up at the end of last year, there are still some uncertainties in terms of how and when some of the policies and tax changes that were proposed during the election campaign will be implemented.

One of these uncertainties is around commercial property depreciation, and whether the new Government will proceed with the proposed changes in the new financial year commencing on 1 April 2024.

In this blog, PMG CFO Nigel Lowe explores depreciation in the context of commercial property, and what the impacts will be for commercial property.

The basics

Depreciation, in simple terms, is the reduction in the value of an asset over time due to wear and tear at a rate predetermined by the IRD. In the year of sale, a wash-up calculation is completed so depreciation is often referred to as a timing benefit.

For commercial property investors in New Zealand, this is a critical factor as it impacts the after-tax return on investment. Currently, the Inland Revenue Department (IRD) allows investors to claim depreciation on their commercial buildings and commercial property fit outs, which reduces their taxable income.

The rate of depreciation depends on the type of property and its intended use.

Policy shifts

When it comes to commercial property depreciation, there are three elements:

  1. Land
  2. Buildings
  3. Fit out

In recent years, New Zealand has seen significant policy changes impacting commercial building depreciation.

For land, there is no depreciation and never has been. With fit outs, there has always been depreciation and that is looking to be unaffected by legislative changes.

The most notable change was enacted on 25 March 2020, as part of a wider economic recovery package in response to COVID-19, which saw the reintroduction of building depreciation for non-residential buildings, which was previously phased out in 2011. This policy reversal, effective from the 2020-2021 tax year, meant that investors could once again claim depreciation on their commercial buildings.

Impact of a potential legislative u-turn

If depreciation is removed, property owners tax expense will increase, which when added to rising costs such as insurance, interest and property rate rises, may cause rent rises for businesses.

For long term investors in commercial property, the removal of tax depreciation on buildings will mean that the taxable component of their investment will increase, i.e. the amount of tax they pay on their investment will increase.

As we approach a new year in New Zealand's political and economic landscape, the ambiguity surrounding the future of commercial property depreciation remains a topic of considerable interest. Looking ahead, it’s evident that any legislative changes will have far-reaching consequences, necessitating a strategic and well-informed response from all stakeholders.

The ability to adapt to these changes, while maintaining a keen awareness of their implications, will be pivotal in navigating New Zealand's commercial property market in the coming years.

Disclaimer: The information in this blog is of a general nature and was current on 23 January 2024. It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013 and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice. Please seek advice from a licenced financial advice provider before making any investment decisions.

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