Property Council seeks more details on proposals to scale-back tax depreciation allowances

The Property Council of Australia has called on the government to better explain proposals to reduce property depreciation allowances used by property investors to reduce their tax bills.

A discussion paper prepared by the Treasury’s Business Tax Working Group (BTWG) recommends a minor reduction in the corporate tax rate paid for by eliminating or scaling back interest deductions under thin capitalisation rules and amortisation deductions.

A thinly capitalised entity is one whose assets are funded by a high level of debt and relatively little equity – as would be the case with the portfolios of many property investors.

The Australian Taxation Office (ATO) currently allows property investors to claim a tax deduction for depreciation of their investments- the general wear and tear that occurs over time.

Peter Verwer, chief executive of the Property Council, says the government discussion paper “is short on hard evidence and analysis.”

“The Business Tax Working Group proposal for changes to thin capitalisation needs to be backed up immediately with a proper briefing to industry, as the paper raises more questions than it answers,” he says.

“While the Property Council believes there is value in exploring options for modernising Australia’s business tax framework, it cannot support any changes that force taxpayers to breach existing contracts and covenants or renegotiate financial arrangements.”

The Property Council previously opposed the doubling of the withholding tax from 7.5% to 15% charged on foreign investors who invest into management investment schemes

Verwer says Australia’s capacity to invest in new capital stock has already been weakened by changes to withholding tax rates.

As a result he says it is critical there are no “competitiveness externalities” arising from a trade-off between “rational tax incentives and a lower headline rate of corporate tax”.

Verwer also wants the Treasury’s modelling of the proposed tax changes to be made available to third parties for independent review.

“In addition, far more work needs to be done on proposed changes to depreciation allowances,” Mr Verwer says.

“Building structures wear out in generating income. It is critical that capital allowance deductions directly reflect the economic life of assets.”

“The BTWG discussion paper offers no persuasive arguments that depreciation changes in the UK and NZ have improved the economic competitiveness of those countries.”

“The Property Council is keen to discuss practical options with the Business Tax Working Group.”