PONSONBY PROFESSIONALS

PONSONBY PROFESSIONALS LOGAN GRANGER: CLAIMING DEPRECIATION ON BUILDINGS

In the past, New Zealand allowed depreciation on all buildings before the 2011-12 income tax year. This then changed and all buildings with an estimated useful life of 50 years or more were depreciated at a rate of 0%, effectively removing building depreciation.

As a result, we taxpayers in New Zealand became an outlier in the international tax community with many studies finding buildings do in fact depreciate.

Recently, building depreciation has been reintroduced in New Zealand. This being for non-residential buildings as part of the past two year’s Covid-19 response measures. However, it positively seems the reintroduction is permanent.

What has changed? From the beginning of the 2021 tax year, depreciation deductions are allowed for non-residential buildings owned at the beginning of this income year or acquired after the beginning of the year, and includes capital improvements.

The depreciation rate for a non-residential building is 2% DV, or 1.5% straight line. Reason for this being, residential buildings depreciate at a slower rate than commercial or industrial buildings and have been excluded by creating specific definitions within the Income Tax Act for ‘residential buildings’ and ‘non-residential building’.

An example which highlights the benefit of this change could be of a purchaser buying a $3m commercial or industrial property, whose value comprised $600,000 for the land (for which depreciation cannot be claimed), plus $1.5m for the building and $900,000 worth of fit-out.

Up until the end of the 2019-2020 tax year, depreciation deductions could only be claimed on the $900,000 building fit-out, typically at a rate of 10-12 percent, depending on the nature of the fit-out, providing a benefit about $100,000.

However, now owners would also be able to claim two percent a year for depreciation of the $1.5m building, adding a further $30,000 a year and taking total benefits to $130,000 a year for every year they continued to own the property.

In some cases, where certain groups are considering property purchases worth tens of millions, they will now be eligible for six-figure tax depreciation claims.

Opening tax book value Past deductions claimed for fit-out will have an impact on the adjusted tax value of any non-residential building depreciated from the 2021 income year. The 2021 opening tax book value for buildings acquired before the 2010-11 income year comprises:

• the adjusted tax book value at the end of the 2010-11 income year less fit-out deductions taken (if any)

Logan Granger, Ponsonby Office

• Non-deductible capital expenditure incurred in relation to the building since 2010-11.

If the straight-line method is used, the above calculation will also be the depreciable ‘cost’ of a non-residential building that was owned and depreciated before 2010-11.

If the building is sold for more than its adjusted tax book value, this will mean depreciation claimed on the fit-out pool becomes recoverable. When the 0% rate was introduced in 2011, a concession was made for fit-out in a commercial building acquired before the 2010-11 income year that had not been separately depreciated.

The reintroduction of depreciation means it is appropriate that the adjusted tax book value of the building be reduced by deductions taken.

For buildings acquired after the end of the 2010–11 income year, the opening value for the 2020–21 income year is:

• the cost of the building, plus

• non-deductible capital expenditure incurred on the building from the time it was acquired until the beginning of the 2021 income year.

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.

JOHNSTON ASSOCIATES, 14 St Marys Bay Road, T: 09 361 6701, www.jacal.co.nz

14 St Marys Bay Road, St Marys Bay