24 March – As it is currently proposed, the Tax Breaks for Green Buildings has several design features that render it at best a consultant’s windfall and at worst, a $1billion buffer for a government under intense pressure from the Greens to adopt Green policies.
This may seem overly cynical but after studying the discussion paper released by government in January, it is not an unreasonable conclusion.
- The limited scope of projects that will qualify
- The complexity of the scheme
- The uncertainty of qualification
- The operation of the tax depreciation regime.
The first three of these points are inextricably linked. Take for example the eligibility of projects. The scope of the TBGB is limited to buildings with a NABERS rating of two stars or less. Therefore any shortcomings in the NABERS are passed straight through to the tax system. For example, industrial properties, strata buildings and a whole host of other buildings that fall outside the current NABERS rating scheme are immediately “knocked out” of the TBGB
The hurdle that has been set to qualify for the TBGB is that the building has to undergo a retrofit/refurbishment to bring it to four stars or above. This is a huge ask from an engineering perspective, especially for those buildings with a lower than two star rating.
There are many buildings which are just not capable of making that leap in ratings within commercially acceptable cost parameters. There are also anomalies within NABERS whereby properties such as call centres which operate beyond standard hours are unlikely to be able to achieve a four star rating due to the amount of energy used, despite in many ways being “greener” than buildings that are only occupied for eight hours a day.
The key point is that there are significant numbers of buildings that will not fulfill even the “simple” opening criteria. The next hoop to jump through is submitting the project to the DCCEE who have been nominated in the discussion paper as the body to administer this tax break. The DCCEE will scrutinise the submissions and choose which projects may, or may not, be accepted into the scheme. The critical factor here is that the project documentation cannot be signed until acceptance has been made into the scheme!
The commerciality of waiting for the DCCEE, or whoever gives final approval, to start a project is questionable, to say the least. The project managers will be tearing out their hair as another layer of red tape (it can hardly be called green tape, can it?) and delays are added into an already complex and time consuming development process.
Will this uncertainty and the amount (and cost) of work involved in making a submission put off smaller property investors? This uncertainty impacts on the financial models on which they analyse their refurbishment plans. Not that those models will be even taking “after tax” into account, which is the beautiful irony in all this.
Certainty that the end result will match the proposed outcome is another problem: NABERS ratings on refurbished buildings won’t be available until a year after completion of the project.
Depreciation is not a powerful driver
The final point relates to the concept of using depreciation as a driver for changing investment habits. The first thought that springs to mind is that very few property investors, owners or fund managers are measured on after-tax profits. It is therefore unsurprising to learn that even fewer look at the after-tax position when planning the refurbishment of their assets. That isn’t to say of course that they won’t snap up a tax break when it is offered to them, but it does mean that there must be more effective and efficient means of changing their behaviours.
Over the years I have reviewed many company’s depreciation schedules and few take full advantage of the current concessions. If they are interested in more tax deductions, then that would be the obvious place to start.
I believe depreciation is not fully optimised and that green depreciation will not work as a tool to green buildings because of this lack of pressure to scrutinise after-tax returns and also the tangible outcomes of claiming depreciation.
Tax depreciation compensates taxpayers for the decline in value of the assets within their buildings, similar to a sinking fund. Subsequently, when you divest the building, if it and the assets therein, go up in value, there is a claw back of that depreciation.
Depreciation is deducted from taxable income. This means that for properties held in a trust structure, the benefits flow straight through to the investors. The trust itself, which may be the manager of the assets or be stapled to the manager of the assets, will not see the benefit of the depreciation and therefore potential depreciation benefits are unlikely to make an impact on their decision making.
The timing of these deductions also limits their effect on decision making. The reduced tax payments that reflect the depreciation may not be made until many months, if not years, after the start of incurring capital costs on a refurbishment project.
The current proposal states that a NABERS rating must be achieved and DCCEE completion certificate obtained before a deduction is claimed, thereby guaranteeing that the benefit will not be available until at least one year after practical completion of the project.
In summary, the key problem with the TBGB is that it impacts upon property, construction, engineering, finance and taxation decision making. There are significant implications for each of these areas which make it hard to quantify as a whole, as within an organisation the different stakeholders have different agendas. This, along with the long wait for the benefits, immediately puts the policy in danger of being consigned to the “too hard basket” for building owners.
The lack of immediacy in the deductions has to be addressed if there is to be any chance of encouraging new retrofit expenditure – there is no point in having any scheme at all if it is just piggy-backing on tax break for works that were going to be undertaken anyway.
So if the whole point of the TBGB is to encourage building owners to spend capital to improve the energy efficiency of their buildings, is it going to achieve it? I would argue that what building owners require most in today’s economic and political environment is certainty and a tangible incentive. The TBGB does not provide either.
Here’s an idea
If the government is committed to using the tax system to provide an incentive then, in an ideal world, it could combine the immediacy of the Green Building Fund with a transferable tax credit system that is linked to the BAS system.
A project is submitted that promises to improve efficiency of a building to a predetermined level and, once approved, is given an immediate tax credit which can be offset against GST, PAYG and withholding tax liabilities in the month or quarter in which it is accepted.
This would mean that building owners would have a tangible benefit, certainty of cash flow and, most importantly, cash to invest in the project. A transferable tax credit would be useful for trusts who could utilise it in a stapled corporate entity or pass it on to other parties that could take advantage of it.
The $1billion for the TBGB is earmarked to last until 2019, so this approach may work if staggered out over a number of years. In any case, a tax credit in place of the suggested tax depreciation deductions could be a significant improvement for our many property trusts at a zero impact on the government estimates.
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