Plan to claw back $1.7b by axing depreciation tax breaks

Property investors will bear the brunt of planned tax changes, with the Government looking to claw back $1.7 billion a year from the sector to help cut income tax rates.

It is poised to stop property investors claiming depreciation tax breaks and is understood to be also considering tighter rules for those who buy and sell for profit but dodge the tax they should pay.

Mr Key made clear that changes to depreciation were likely after he ruled out other avenues suggested by the tax working group, including a universal land tax, a capital gains tax and a flat tax on equity in investment properties. The Government also appears likely to leave in place the ability of property investors to offset losses against other income, as ending it would not raise enough to be worthwhile. The working group favoured ending depreciation breaks for buildings that did not actually decrease in value, but Mr Key suggested it could be scrapped across the board.

"That would still allow investors, including mum and dad, to write off any repairs and expenses that they have, but, really, allowing depreciation of an asset that's not depreciating, at the cost of other New Zealand taxpayers doesn't seem to be fair to us."

The working group estimated that ending depreciation on all buildings – including commercial and industrial – would raise an extra $1.3b a year. But Property Investors Federation president Martin Evans said changing the rules would be a significant blow to investors who had bought in the past five years, and would lead to big rent jumps.

"A lot of them will have properties they would not normally have bought. Some of them will be in trouble, and our advice would be to forgo any maintenance they had planned, like energy efficiency and heat pumps, and put their rents up as much as they can, then reassess whether they can still afford the property. If they can't, then sell it."

At present, tax must be paid on a property sale, if the intention of buying was to make a profit. That can be difficult to prove though, and there are suggestions the Government is considering lowering the test to one where it is assumed profit is the motive for investors buying and selling several times in a short period.

Inland Revenue is already investigating 2000 property investors believed to have dodged $214 million in tax on properties bought and sold in the past four years.