Exploring the Impact of Non-Depreciation on Commercial Buildings

As we embark on a new year, we find ourselves at the crosshairs of significant policy shifts that directly impact commercial property owners.

Last year, both National and Labour campaigned to remove the option to claim depreciation on non-residential buildings. This policy change is projected to raise government revenue by $525 million per year, which is slated to support other tax policies, including income tax cuts and enhancements to the Working for Families benefits.

For commercial property owners, this heralds a significant shift in tax obligations. The inability to claim depreciation on non-residential buildings will result in a higher taxable income, which could lead to an increased tax liability.

To illustrate:

Suppose you own a commercial building valued at $1,000,000.

Under the current rules, you might be claiming depreciation at a rate of 2% per annum, equating to a $20,000 deduction from your taxable income.

At a corporate tax rate of 28%, this deduction could save you $5,600 in taxes each year. Without the ability to claim this depreciation, your tax bill would increase by this amount annually.

Furthermore, the removal of depreciation deductions may compel property owners to increase rents to cover the additional tax costs. This could place a strain on businesses that lease these spaces.

However, note that depreciation on commercial buildings is a tax deferral scheme. When you sell the building and make a gain, the depreciation is claimed back as depreciation recovery which is taxable.

Recommendation:

As you prepare for the next financial year, it’s important to budget for the potential increase in tax obligations due to the exclusion of depreciation. As your trusted partners we are here to provide you with the expert advice you need to navigate these changes.