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Depreciation may need looking at: Commission

The government might need to take another look at its removal of depreciation for investment properties, says the Productivity Commission.

Monday, December 19th 2011, 12:00AM 1 Comment

by Rob Hosking

The commission - formed last year as part of the National Party's support agreement with the ACT Party - released its first report, on housing affordability, this morning.

The 228-page report - which is only a draft - covers a wide range of topics affecting the housing sector.

Although broadly supportive of the changes the government has already made in the tax area, the commission says the removal of depreciation needs to be monitored.

Removal of depreciation "appears to have been based on an assessment that for buildings, ‘capital gains' which are not assessable, and outlays on repairs and maintenance, which are deductible, offset physical depreciation," the report says.

"From this perspective, the recent elimination of depreciation deductions for buildings can be seen as a ‘pragmatic' way to cut through a situation involving a number of moving parts - capital gains, inflation, rates of physical decay, and repairs and maintenance outlays.

"That suggests a need for something of a watching brief to check, going forward, whether those moving parts continue to more or less balance out."

If house prices fall in real terms over the next decade, the report says, then more "tweaking" might be repaired, the report says.

"Being unable to claim neither depreciation nor capital losses could result in insufficient recognition of the economic losses of providing rental accommodation, and hence create a huge disincentive to invest in it - just as the combination of depreciation deductions and tax free capital gains drew investment into the sector."

The commission is not in favour of a capital gains tax, on broadly similar reason to those which led the Tax Working Group, two years ago, to rule out such a tax.

That is, the commission accepts there is a case for widening the tax base by including capital gains on housing, but notes that this case falls to the ground if owner-occupied housing is exempt, and if it is imposed only when a property is sold and not on an annual, accrual basis.

The report also advises strongly against "ring fencing" rental losses, saying it would only create a new set of distortions.

The commission also says the "tax advantage" enjoyed by investment in housing has been over-stated. While accepting there is some advantage, the commission says that most of the tax advantage applies to owner-occupied housing.

The only area the commission sees some significant tax advantage for landlords is the ability to claim full deduction for interest costs.

"While a combination of house price inflation expectations, and relative ease in arranging debt too finance residential rental investments, will have been the main driver of the upsurge in investor appetite for leveraged rental investments during the recent housing boom, full deductibility of the interest expense will have been an added factor."

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

« Nationwide sales show double-digit growth2011 ends with marked fall in new listings »

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Comments from our readers

On 20 December 2011 at 10:30 am Tony said:
Any dummy can see what happens when depreciation on rental properties are eliminated.Look to the events in Australia in 1985. They quickly changed the rules again more as an incentive to property investors. At the moment most investors feel they are like a de-facto social welfare dept.Things will get even worse when they discover the tax they have to pay in 2012 returns.Rents will have to rocket up ,or Investors will start selling off their properties even faster than before.
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Lender Flt 1yr 2yr 3yr
AIA 4.55 2.55 2.69 2.79
ANZ 4.44 3.15 3.25 3.39
ANZ Special - 2.55 2.69 2.79
ASB Bank 4.45 2.55 2.69 2.79
Bluestone 3.49 3.49 3.49 3.49
BNZ - Classic - 2.55 2.69 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 3.15 3.29 3.39
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
Lender Flt 1yr 2yr 3yr
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online 2.95 1.99 2.35 2.45
Heretaunga Building Society 4.99 3.50 3.40 -
HSBC Premier 4.49 2.45 2.60 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 3.69 2.45 2.65 2.79
Kainga Ora 4.43 2.93 3.07 3.24
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.30 3.54 3.54
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.55 2.79 2.79
Liberty 5.69 - - -
Nelson Building Society 4.95 3.45 3.49 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
Lender Flt 1yr 2yr 3yr
SBS Bank 4.54 3.05 2.99 2.99
SBS Bank Special - 2.55 2.49 2.49
The Co-operative Bank - First Home Special - 2.25 - -
The Co-operative Bank - First Home Special - - - -
The Co-operative Bank - Owner Occ 4.40 2.55 2.69 2.79
The Co-operative Bank - Standard 4.40 3.05 3.19 3.29
TSB Bank 5.34 3.29 3.45 3.59
TSB Special 4.54 2.49 2.65 2.79
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 3.15 3.29 3.39
Westpac - Offset 4.59 - - -
Lender Flt 1yr 2yr 3yr
Westpac Special - 2.55 2.69 2.79
Median 4.55 2.93 2.99 2.80

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