Depreciation on Commercial Property in New Zealand

This article discusses the removal of tax depreciation on commercial buildings in New Zealand, which is touted to happen in 2024.

The build-up to the October 2023 general election in New Zealand saw similar scenes as any other general election – parties throwing out promises that were often contradictory and regularly debated. Unusually, there was agreement on one policy: that tax depreciation would be removed from commercial buildings.

While the detail and timeline were unclear at the time this article was written, given that both parties campaigned on such a promise, it is likely to be enacted in some form for the 2024/2025 financial year. 
[UPDATE: The removal of depreciation as a deductible expense on commercial buildings came into effect from 1 April 2024]

In the haze of election promises, many investors would be forgiven for missing this key change – a change that will have a material implication for commercial building owners. Even without the details of this policy, it is evident that it will hit property owners in the pocket and will likely have significant tax, financial, reporting and commercial implications.

Let’s work through what we know.

What is depreciation?

Depreciation is the reduction in the value of an asset over its useful life. This is accounted for based on a rate predetermined by the IRD.

In commercial property in New Zealand, depreciation refers to the reduction in the value of a commercial property over time due to wear and tear, ageing and becoming outdated.

For tax purposes, depreciation is the annual deductible expense allowed over the asset's useful life. Allowing depreciation on commercial buildings creates a timing difference for tax where the future sale of a property at or above its book value results in accumulated depreciation becoming taxable income.

What’s changing and what’s not?

A commercial property comprises land, building fit-out, and the buildings themselves.

The land the property sits on cannot be depreciated.

The fit-out in a property has always been able to be depreciated – this will most likely remain.

Building depreciation has been part of a game of ping pong. Buildings were able to be depreciated until 2011, then not able to be depreciated between 2011 and 2020. In March 2020, building depreciation was reintroduced again as part of the wider economic recovery package in response to Covid-19. It is likely that this will be reversed again in the near future, meaning that, once again, buildings can no longer be depreciated.

Removing depreciation on commercial property removes the tax timing difference described in the previous paragraph.


Impact of the change

Depreciation on buildings can make up a substantial deductible expense for tax purposes. By removing this expense, the taxable profit for the property owner increases, and hence, the tax to pay increases. Tax is a real cost to investors, reducing the net return for investors in commercial property.

At Mackersy Property, we are working closely with the accountants of each of the properties under management to take this likely change into consideration. As each property’s cash flow for the 2024-2025 financial year is completed, these presumptions are included to ensure full visibility and forward planning. 

If you've got questions on how this change may affect you and your portfolio, please contact us at invest@mackersyproperty.co.nz or 03 450 9540. 

Disclaimer: The information in this blog is of a general nature and was current on 7 February 2024. The information provided in this article is of a general nature and should not be considered personal investment advice. Investing in commercial property, as with any investment, carries potential risk. Before investing, please seek advice from a financial advisor who can advise on the best options for you.