Brick by brick: The (re)demolition of tax depreciation on commercial buildings

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Commercial building owners have enjoyed being able to claim tax depreciation deductions on their buildings since 2021 but this is looking likely to change following the election.

Although Labour’s election policy to remove GST from fruit and vegetables has received a lot of media attention, what was less reported at the time was that they will fund this in part by removing the ability to claim tax depreciation on commercial buildings.

In a perhaps surprising turn of events, National has found common ground with Labour by stating in its 2023 Election Tax Policy that they will also remove depreciation on commercial buildings. With the two largest parties agreeing on an issue—an uncommon occurrence in politics this close to an election—it is worth considering what impact this will have if you own commercial buildings.

What is depreciation?

Depreciation is a type of tax deduction. Business expenses are generally deductible from total revenue because tax law aims to tax profits. Expenditure relating to day-to-day operations is generally deductible immediately in the income year incurred, but capital expenditure – relating to fixed assets which provide an enduring benefit to the business – is usually deductible over time through depreciation deductions which are intended to reflect the rate loss in value of the asset over time as it is used to earn income.

Recent history of tax depreciation on buildings in New Zealand

Commercial buildings were historically depreciable up until 2011, when the National Government removed the ability to do so on the basis that New Zealand building price data between 1993 and 2009 showed that on average buildings had been increasing, not decreasing, in value. In the 2021 income year, Labour reintroduced depreciation for non-residential buildings as a Covid-19 support measure. At the time this was quoted as being a permanent change to help businesses and spur economic growth. It is therefore interesting that only a few years later Labour have reversed course.

Things to consider if you are currently claiming tax depreciation on commercial buildings

If your business is currently claiming tax depreciation on buildings, this change may have significant implications. As we do not yet have any legislation for this change, and will not have any until after the election, the exact scope of any changes is unknown, but listed below are some things you might need to consider in due course:

Firstly, what is the meaning of a “building” and is your building caught by the removal of tax depreciation on non-residential buildings?

Have you split out the fit-out from the building structure when recording the commercial building in your tax fixed asset register? Have you got support for the split out and the values used?

What will the cash tax impact be for your organisation from the removal of tax depreciation on commercial buildings, including on provisional tax payments?

How will you determine whether future expenditure on your building is deductible repairs and maintenance or, instead, capital improvements that will now be non-deductible, non-depreciable “blackhole” expenditure?

If you are considering buying, or building, new commercial buildings, how will this change affect the financial outcomes of the project?

If you are required to account for deferred tax in your financial statements, there are a number of additional points that need to be considered and for which you will likely need expert advice and assistance.

As with any change in legislation, it can be difficult to understand the implications it will have on your business. For commercial certainty and peace of mind, you should seek professional tax advice if you think you may be affected.

Related: Which taxes will endure the election cycle

Andrea Scatchard
Andrea Scatchard
Andrea Scatchard is a Tax Partner at Deloitte, based in the Bay of Plenty. She can be contacted on ascatchard@deloitte.co.nz

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