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NZ Tax Hit To Property Investments

Friday, June 18, 2010

The Kiwi Income Property Trust (KIPT), the largest listed trust investing in New Zealand property, has provided its view of the implications of the tax changes introduced in the government’s budget last month.

KIPT says that the changes that will directly impact the Trust include a reduction in the depreciation rate applicable to ‘building structures’ to 0%, with effect from April 1, 2011; and the removal of depreciation loading for assets acquired after May 20, 2010 (under the current rules, depreciation loading increases the depreciation rate by 20% for qualifying assets, such as certain plant and equipment). There will also be a reduction in the portfolio investment entity (PIE) tax rate applicable to the Trust from 30% to 28%, with effect from April 1, 2011.

KIPT has decided that the net result of these changes will be an increase in its effective tax rate and, ultimately, a decrease in income available for distribution to its unit holders. Based on available information, this decrease has been assessed at approximately 5% for KIPT in the first full year (being the year ending March 31, 2012) and diminishing thereafter.

The change in the depreciation rate applicable to ‘building structures’ will also result in a reduction in the tax book value of items classified as ‘building structure’ to nil for financial reporting purposes, because future tax deductions will no longer be available from the financial year commencing April 1, 2011. Consequently, this will increase the deferred tax liability recorded by KIPT in respect of depreciation, with a corresponding increase in income tax expense.

Chris Gudgeon, Chief Executive of the KIPT’s Manager, said: “It is disappointing to note the New Zealand government’s decision to effectively target tax increases at investors in property trusts listed on the New Zealand Stock Exchange. Many of our 11,000 unit holders are retirees supplementing their income in retirement and people saving for retirement through Kiwisaver schemes.”

“The result of this government’s actions has been a significant diminution of unit holder wealth across the whole listed property sector on the New Zealand Stock Exchange, due to its decision to not differentiate between residential rental property investors seeking tax-free capital gains and our investors who, in contrast, not only support New Zealand’s capital markets but also pay significant tax through KIPT on rental income.”