Shopping centres would struggle to qualify for the tax breaks because they are owned by real estate investment trusts

Leon Gettler

24 March 2100  – A centre-piece of the ALP campaign in last year’s election was its promise of $1 billion in tax breaks for businesses on investments in energy-saving measures for commercial building, one of a number of climate change announcements designed to fill the gap left by shelving the emissions trading scheme until 2013.

But critics say the tax incentive scheme will achieve little if anything because of the way the tax benefit is structured.

The green building tax break will run from mid-2011 to mid-2015. This was a critical initiative because commercial buildings are responsible for 10 per cent of Australia’s greenhouse gas emissions.

The government is now in the process of bedding down the program that will see successful applicants applying for a one-off bonus tax deduction of 50 per cent for investments in eligible assets or capital works associated with the retrofitting of existing buildings to improve the energy efficiency rating under the existing National Australian Built Environment Rating System. In other words, they are supposed to get their half their investment back.

That’s in theory. One big bone of contention, however, is the requirement that to qualify for a tax benefit, the building upgrade needs to achieve a two star improvement in NABERS rating, that is to say, from two stars or lower to a rating of four stars or higher.

The property industry has told the government in no uncertain terms that this is too restrictive and that it will shut out many buildings that need to reduce emissions.

The REITs

Another problem lies with the real estate investment trusts. Critic says real estate investment trusts, which own a massive slice of office and retail space around the country, would be locked out of the scheme. This is because under the tax system, real estate investment trusts are “flow through vehicles” where all income and benefits generated by an asset flow through to the passive investment unit holder.

Under the scheme proposed by the government, the proposed investment allowance flows through to the unit holder, not the trust which is responsible for making decisions about the building. In other words, the decision-making entity would be ineligible. Go figure.

This is a key problem because, according to the Property Council of Australia, 46 per cent of all shopping centres around the country are owned by trusts, 40 per cent of all investment grade buildings amounting to 9.4 million square metres and 80 per cent of all property owned on behalf of 11.2 million Australian superannuants.

None of these would be eligible for a tax break under the government proposed scheme, as it now stands.

Indeed, the Shopping Centre Council of Australia says that Australia’s biggest shopping centres would not even be eligible for a tax break because they are all owned by real estate investment trusts.

The government has been told one way to get around this is by delivering the benefit as a tax credit.

The government has been taking submissions on the programs as it prepares to bed the scheme down.

Lexia Wilson

Lexia Wilson, a partner at law firm Norton Rose, is scathing about the requirement. Put simply, the smaller end of town would not be able to afford it.

She says there are three problems with the scheme: it is too restrictive, the tax benefit for trusts is questionable, if it exists at all, and companies would have to wait too long to get any return on their investment.

“If you are above two or even zero or one star, it’s an enormous an expensive lead to get to four stars,’’ Wilson says. “If you are three stars, there is no point in applying unless they change the criteria.”

The government has told the industry that it is locked into that commitment because it was part of their election pledge. Critics would say Prime Minister Julia Gillard has since backed away from other commitments, would one more be so bad?.

Wilson says that another problem lies with the tax benefit for real estate investment trusts. These trusts are not trading entities, they are passive in terms of income. They are therefore taxed to reflect that passive nature, and therein lies the problem.

“The tax break does not deliver the same sort of financial benefit to passive investment trusts as it would to trading trusts or a corporate entity that was claiming the deduction,” she says.

At least with grants, you get the money from Day One. Not so with a tax break.

“Even if you did qualify so you were two and below and now have four and above, and you are not a real estate investment trust and you meet all the criteria, there is a time lag in which you have to fund the capex and you won’t get your tax break until you have achieved that rating,’’ she says.

“The problem is that once you complete the works, you need to do another 12 months measurement in order to see whether you have achieved that rating because the NABERS rating tool is measuring a building from an operational perspective in terms of it consumption.

“You might spend money and you may not get that financial benefit for three years.”

She says the scheme in its present form actually undermines the work of the Australian Carbon Trust (see our article) established to provide support for green buildings with a return on investment, and the government pledge to reduce emissions.

“It does in that sense undermine not just the carbon trust but generally the government policy trying to drive and encourage owners to green retrofit so that energy consumption is decreased,” she says.

In its submission, prepared by its deputy director Angus Nardi, the Shopping Centre Council of Australia says that 56 per cent of all shopping centres that would otherwise be eligible would be rendered ineligible. That amounts to 8.6 million square metres of shopping centre space around Australia.

It also says that the proposed two to four star improvement is too restrictive. “We strongly believe that the proposed criteria will limit uptake of the scheme and, therefore, the achievement of the Government’s cost-effective emission reduction objectives. Why can’t a centre be improved from 1 to 2 stars, 1 to 3 stars, 2 to 3 stars, or 3 to 4 stars, and receive benefits under the scheme if cost-effective emission reductions are achieved?”

Both the Shopping Centre Council and the Property Council have told the government it should consider alternative equivalents, like for example, providing a tax credit.

According to the Property Council, the extra benefit from a tax credit is that it would not take a building owner as long to get the money. It can take 22 months to get a tax deduction. But by streaming the benefit through the BAS and PAYG system, the tax break can be claimed quickly in the following month’s BAS.

The next step lies with the government to consider the submissions and see whether the scheme can be structured to get the support from the property industry. That’s the sector that is actually making the decisions about the buildings.

Note:

Submissions to the tax break proposals closed in February. Submissions were received from: A.G. Coombs Advisory Pty Ltd Honeywell Building Solutions Air Conditioning and Mechanical Contractors’ Association Greenbridge QS Consultants Arup Pty Ltd ING Real Estate Investment Management Astec Paints Lake Macquarie City Council Atlantis Design Lend Lease Australian Carbon Trust Ltd Lighting Council Australia Australian Direct Property Investment Association Master Builders Australia Australian Institute of Architects Moreland Energy Foundation Limited Australian Institute of Refrigeration Air Conditioning and Heating National Tourism Alliance Australian Property Institute Norman Disney & Young Brisbane BSA Limited Norman Disney & Young N.S.W. Colliers International Pty Ltd NSW Department of Environment, Climate Change and Water Consult Australia Open Energy Pty Ltd CSR Limited Origin Energy D&E Airconditioning Pty Ltd Paul Graham Department of Infrastructure and Planning (Building Codes, QLD) Point Partners Ecofund Queensland Property Council of Australia Energy Efficiency Council RICS Oceania Enman Pty Ltd Shopping Centre Council of Australia Envestra Limited Stephen J. Pitney & Associates Pty. Ltd Ernst & Young Sustainability Victoria Eureka Funds Management Limited The Climate Institute Evans & Peck Pty Ltd The Institute of Chartered Accountants in Australia Facility Management Association of Australia Tourism & Transport Forum GDF SUEZ Energy Services Wesfarmers Limited Green Cooling Association Inc Westfield Management Limited Green Building Council of Australia Window Film Association of Australia & New Zealand WSP Group