Opinion & Analysis
Like most New Zealanders, I enjoy taking a pleasant day off on a public holiday. My family recently took the opportunity to visit central Christchurch, mainly to see the "Banksy" exhibition at the Canterbury Museum.
However, we also took a stroll along Worcester Boulevard, through Cathedral Square to the container mall.
For someone who was born and bred in Christchurch, a lot of feelings come through when taking such a walk. There's some sadness at the loss of so many familiar buildings and the memories they carried.
Although this ages me, I remember being taken to play at the rooftop of the Haywrights building. There's wonder at the entrepreneurship and energy of old survivors like Ballantynes and excitement from the rejuvenation shown in the container mall and Antony Gough's burgeoning development at The Terrace.
And there's frustration at the number of buildings still to come down and the swathes of open spaces yet to be filled as we approach the third anniversary of the most devastating of the earthquakes.
Those feelings will no doubt be shared by the many investors who own property that, one way or another, has been affected by the earthquakes. The Government has made a number of changes to the tax rules to provide some relief to the financial pain.
Amongst those measures is "depreciation rollover relief". Money spent on assets that are going to last for a while generally can't be claimed as a deduction in the year of purchase. Instead, their cost is claimed through depreciation, over the period of time that the asset is expected to last. If an asset is later sold for more than its depreciated value, the excess is taxable income called depreciation recovered. (Any excess over the original cost will generally be a tax-free capital gain).
Receiving insurance proceeds for the loss of an asset is treated as if the asset was sold to the insurance company for the amount of the insurance proceeds.
The earthquakes resulted in a fair bit of depreciation recovered arising from insurance receipts on buildings and other assets.
Rollover relief allows owners of assets that were affected by the earthquakes to roll over any depreciation recovered into qualifying replacement assets. That way, any tax bill is deferred until the replacement asset is sold. We are now seeing are a number of perfectly fine buildings being compulsorily acquired by Cera.
These are to be demolished to make way for the new city plan. In some cases, the compensation will exceed the depreciated value, but the rollover provisions don't extend to providing relief from tax on depreciation recovered on compulsory acquisition. At best, there is a provision that allows such income to be spread over up to four years. This has been around for years and is used when there's a compulsory acquisition under the Public Works Act.
A tax bill currently before Parliament is set to make some changes to the existing rollover relief measures, including their extension for a further three years. This is a welcome move. However, it would be good to see the provisions extended so that they also provide relief in the event of compulsory acquisitions by Cera. Surely the same principles apply to depreciation recovered in such a situation to prevent (in the words of Inland Revenue policy officials) "the unanticipated windfall gain that would otherwise arise to the Government".