Commercial Buildings Acquired After the Start of 2012 Tax Year

 
Grange Associates Ltd - 27 February 2012

If you have purchased a commercial building on or after 1 April 2011, but did not obtain a valuation of fit-out at the time of purchase, you may wish to do so before you complete your annual accounts for 2012.

Conversely, given the IRD’s stance on building fit-out in their transitional ruling, applying a value of 15% of the total building purchase price to fit-out may be a simpler way of valuing fit-out.

If you are contemplating purchase of a commercial building, it would be prudent to obtain a valuation of building fit-out, to ensure your depreciation claim is maximised.

Definition of a Commercial Building

According to the new legislation, a commercial building is one where the main use is for non-residential premises and any residential premises within the building are of a secondary and minor use.  If the main use is not clear, one method for determining it is to compare the area of the building used exclusively for residential accommodation against the remaining area of the building.

This distinction is important with regard to the new depreciation treatment of building fit-out.  Whilst fit-out remains depreciable for commercial buildings, for residential rental properties, fit-out is included as part of the building itself and is thus no longer depreciable.

The dominant purpose of the building determines the tax treatment of items of shared fit-out.  So if a building was mostly occupied with commercial tenants, with a small apartment on the top floor, items of shared fit-out such as electrical cabling, sewerage and plumbing would all be depreciable.  However, the non-shared fit-out within the apartment itself would not be depreciable.

Defining “Commercial Fit-out”

A definition has been introduced in the new legislation.  It clarifies that plant attached to a commercial building is generally an item of commercial fit-out and is therefore depreciable separately from the building.

The second part of the definition excludes “building core” from being commercial fit-out.  This includes items holding up the building or used to weather-proof the building.  Non-depreciable building core would include foundations, building frame, floors, external walls and doors, cladding, windows, roofing and load-bearing structures such as pillars and load-bearing internal walls.

IRD Building Fit-out Depreciation Schedule

Below is the IRD’s schedule of Building Fit-out items, these can all be depreciated separately from the “building core”.

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