The potential implications from Tax Working Group’s interim report, released yesterday, are positively balanced for the listed property sector, Forsyth Barr analysts Hayden Strickett and Jeremy Simpson suggest.
The interim report proposed broadening the existing narrow range of capital gains taxes to capture profits on the sale of a far wider range of assets than the current regime, but proposes reinstating depreciation on commercial and industrial buildings, following its removal in 2011.
“While a capital gains tax would increase tax paid when selling assets, potentially reinstating depreciation of building structure could be a material positive for the [listed property vehicle] sector,” said Strickett and Simpson. “It’s important to note the interim report is only an issues paper, with the finalised report (and recommendations) to come in February 2019.”
Reinstating depreciation “could reduce the average effective tax rate across the sector from about 21 percent to about 14 percent, which is about 5 to 10 percent accretive for earnings, with the benefit flowing through to investors through the PIE structure,” the analysts said. “Partially offsetting this impact is greater depreciation recovery when selling assets.”
In a letter published yesterday updating the government’s instructions to the working group, Finance Minister Grant Robertson also asked for consideration to be given to the tax treatment of seismic strengthening, including for residential and heritage buildings.
The independent group’s final report is due next February.