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MAY 10

Accelerated Depreciation

There has been much discussion on balance, balancing the economy as a result of balanced tax treatment of various activities and asset classes. Balance in regard to how New Zealand fits in the world; the need for headline tax rates similar to Australia or risk losing activity offshore or placing competitive disadvantage on or companies. Competitive dimensions exist elsewhere, R&D support, depreciation rates, cost of capital, and of course exchange rate issues. Get them right our tradeable sector grows; continue to get them wrong and our tradeable sector will continue to contract in value.

Putting aside the competitive dimensions in regard to depreciation the technical argument revolves around the principal that the economic value of an investment should be consumed over its economic life, that is, the purchase price depreciated over the useful life of the equipment. That might apply to land and building (if they depreciate at all) but for the machines of production many things influence useful life – particularly on-going demand for the stuff produced, technological change and competitive behaviour. For example if I have a house and someone builds a much better house next door the value of my property has probably been enhanced. Unfortunately if I have a productive machine and a competitor buys a better one then the value of my machine has just been reduced. Another basic point in the New Zealand context is the absence of an effective second hand market that makes achieving more than scrap value for any machine difficult at sale time.

Now turning to the issue of incentive, when I buy a new machine there is no guarantee that the market will exist to recover the value of that machine, the longer I have to wait to amortise the purchase price the greater the risk (no discussion here about the madness and impact of exchange rate fluctuations) – so the faster I can write of the machine the less risk I carry. It is worth noting there is no loss to tax revenue only a timing issue provided the taxpayer can stay in business.

So what do you want to see, what we have, less and less productive investment or something different – the removal of the accelerated depreciation on plant and equipment this year the cancelation of Labours R&D tax credit last year (even that was less generous that most other jurisdictions), its pale shadow replacement this year is of little comfort.

Successive governments in New Zealand have demonstrated a deep and fundamental misunderstanding of the needs and drivers of the added value economy, Labour started to get it in their third term but sadly National are well off the pace.

Here is a letter we sent to Bob Buckle on this matter.

http://www.johnwalley.co.nz/files/100413 TWG BB2.pdf

tags: accelerated depreciation, fiscal policy, tax credits
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