Govt's tax changes means tenants will pay more rent

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The government’s decision to deny property owners depreciation claims means that tenants will end up paying more for their rent.

Friday, May 21st 2010, 12:00AM 3 Comments

by The Landlord

Finance Minister Bill English acknowledged rents, in the commercial and residential arenas, will rise however he suggested the increases will be small.

Informetrics managing director Gareth Kiernan disagrees. He predicts rental inflation will be 5% by March next year and will reach 8% by 2012.

He says because residential property investors are losing the depreciation gain they enjoy at the time of purchase they will have to compensate by increasing rents.

"Depreciation changes are going to put more pressure on cashflows for property investors," he says.

This, he says, will put upward pressure on rents particularly over the next two years. Part of these increases will be catch up and part will be to compensate for tax changes.

"There will be cashflow pressures on landlords."

Bayleys Valuation director John Freeman agrees rents will rise. Property investors and owners will not be able to absorb the changes in depreciation expense claims on their properties.

"That will probably reduce net income from the investment so there will have to be movement on rental levels, and the only way investors can maintain yield margins is by increasing rents."

He says a residential property investor purchasing a rental property for a cost of $300,000 (again excluding land) can expect a basic tax depreciation claim of between $6000 and $9000 for the first year of ownership.

From April 1, most residential property investors - even allowing for segregating of assets into building and fitout/chattels categories - the figures will almost certainly disappear, and depreciation allowable claims will be significantly reduced.

The good news is the depreciation changes do not effect chattels and fit outs.

The Budget outlined that repairs and maintenance costs to keep properties in good condition to maintain their value would still be allowed.

"Nothing seems to have changed in this respect in the Budget," Freeman says. "For the time being, depreciation claims on building fit out and services not currently designated as buildings will be allowed.

Kiernan didn't expect ring fencing of losses to be included in the budget as it had been tried before and didn't work.

"It's not particularly efficient," he says. "People found ways of getting around it."

The depreciation changes introduced are not likely to raise as much money as first expected.

The Budget estimates that these actions on property investment will raise $685million in 2011/12 rising to $690 million in 2013/14.

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