The developing uncertainty brought about by the spread of the coronavirus has quite understandably posed far more questions than answers for the property market.
New Zealand Finance Minister Grant Robertson has 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 $2.1 billion. Here’s a simplified overview of what that means for investors.
A smart move
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This policy implementation will not have any immediate short-term impact on property owners as for most taxpayers, the first relevant tax year ends 31 March 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 glance, but being able to claim tax relief against the value of a property structure at 2 percent Diminishing Value basis or 1 percent Straight Line basis (to use technical tax language), supports the investment case for new property development and investment in modern, quality commercial buildings.
Impact on investment – a working example
To paint a clearer picture of depreciation deduction in action, here’s a simplistic example using the diminishing value method.
An investor purchases a new-build industrial property for $60 million, with a build cost of ~$55 million.
Prior to the government 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 percent tax rate and post-outgoings effective rental income of $3 million per annum (5 percent 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% percent or $190,000 on an investors’ tax bill. There are similar savings in following years, albeit diminishing slowly because of the DV depreciation method applied.
Tax is of course much more complicated than the above example which is purposefully simplistic to illustrate the impact from an investor’s viewpoint. Equally, every building is different in terms of land value, fixture and fittings and building structure value. Yet despite it being very difficult to generalise, this change is significant.
Final word
The importance of sustaining long-term property development in New Zealand is paramount and we applaud the government for taking action to safeguard the future.
We entered 2020 with the lowest vacancy rates on commercial buildings since JLL started recording over 25 years ago. A substantial proportion of existing stock is now over 20 years old, and our city centre office and major city region industrial markets are crying out for quality stock from which to operate from.
It is vital then that we keep looking to the future with policies like these and take advantage of modern technology 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.
