FAVOURITES: ANALYSIS – 26 July 2010 – It isn’t every Monday you wake up to the fact that a Sunday press release by the incumbent Government in the run up to a general election contains a promising policy.
Yesterday the Labor party announced its Tax Breaks for Green Buildings initiative aimed at improving the energy efficiency of commercial buildings. If Labor is re-elected, the tax break will run from the 1 July 2011 until 30 June 2015 and reward building owners who undertake capital works projects to improve their NABERS Energy rating from 2 stars or less to 4 stars or more. The tax break will take the form of a one off bonus tax deduction of 50 per cent.
There are as yet few details as to the operation of the tax break but indications are that it will be available for commercial office buildings as well as some hotels and shopping centres.
The main departure from previous investment allowances is that the TBGB will be available for expenditure on both capital works (building) and depreciating assets (plant and equipment). This is a major step forward as capital works tend to form the largest proportion of capital expenditure due to the ATO’s rather tight interpretation of “what is a depreciating asset”.
To fill the gap in the end of the current investment allowance and the TBGB, the Gillard Labor Government will provide an addition $30 million of grants within the existing Green Building Fund framework in Financial Year 2010-11.
So, what is it that is good about this policy?
For me, the best thing about it is that it rewards both risk and actual improvement. To take a building from a 2 stars or less NABERS Energy rating to a 4 stars or more NABERS rating is a significant achievement and if undertaken across the board will have a huge impact on the contribution of commercial property to the Australia’s total emissions.
As it rewards the change in ratings it also a far more targeted reward than other suggested tax benefits, such as green depreciation. This should help level the playing field for the property owners with smaller portfolios of older buildings with very low ratings who do not have the benefit of in-house sustainability expertise. There are real concerns about the obsolescence of these buildings and hopefully the TBGB will go some way to remedying this.
There is still an inherent problem with using tax deductions as a carrot to encourage investment in environmental improvements and that is that the financial decisions relating to return on investments are usually made without taking tax into consideration. This is especially true where, tax deductions are deferrals of tax; we do not know at this stage whether this will be subject to a clawback on disposal.
There is also the issue of implementation. The last thing the commercial property industry needs right now is uncertainty and the possibility of a significant tax break that will not apply until 1 July 2011 may have a negative impact on the building industry in the current financial year – the stop-gap additional grants from the Green Building Fund may not be enough to offset this.
The key other issue may be in the shortcomings of the NABERS system. For example, you cannot currently rate a strata building and given the fact that many strata buildings will be in the 2 stars or below category they are likely to be further disadvantaged by not being able to access the TBGB.
There is also an element of uncertainty; NABERS ratings are not guaranteed even if you appear to do all the right things as a building owner. It can often take far longer than the minimum one year following a refurbishment to achieve the desired rating. This could have an adverse impact on the cash flow of a project which is relying on being able to take advantage of the GBTB.
How does the proposed Tax Breaks for Green Buildings compare to the Green Building Fund and the oft discussed green depreciation?
Simplicity: TBGB wins. A 50 per cent deduction across both buildings and plant is about as simple as it gets. Although there will be a requirement to undertake NABERS ratings there is no mention of any further compliance hoops to jump through and as this is dovetailing with the mandatory disclosure regime these ratings will often be necessary anyway.
As the TBGB calculations will be separate to the regular depreciation regime it won’t hold up the depreciation calculations on the property whilst NABERS ratings are attained.
This is of course all subject to drafting of the legislation. The Green Building Fund involves a substantial amount of paperwork and there can be significant leakage in consultancy fees.
Improving the efficiency of commercial buildings: TBGB wins. There has to be real energy efficiency gains to qualify for the TBGB. The simplicity and clearly defined life of the TBGB will appeal across the board from the listed property trusts to the owners of single buildings versus the practicalities of green depreciation and the processes and timing issues around the Green Building Fund.
In summary, this is a neat idea from the Labor Party that could be shaped into a great policy given the right legislative drafting.
How will the Coalition respond? Will they up the ante?
Nicola Woodward is director Apex Property Consulting