Depreciation on Buildings – New Rules for 2012

 
Grange Associates Ltd - 27 February 2012

Changes have been introduced to the depreciation rate of buildings after being signalled in Budget 2010. These were intended to make New Zealand's tax rules more neutral by recognising that depreciation on long-lived buildings provided tax depreciation in excess of true economic deprecation.

The depreciation rate of buildings with long estimated useful lives has been changed to 0%. This new rate applies to all such buildings regardless of when they were purchased and is effective from the beginning of the 2012 tax year.

Key features

• The annual depreciation rate for buildings has been set to 0% if they have estimated useful lives of 50 years or more, as determined by the Commissioner of Inland Revenue.
• This new rate applies regardless of when a building was acquired.
• Building owners that have previously claimed a depreciation deduction on their buildings are still required to pay depreciation recovery if they sell a building for more than its tax book value.
• To ensure that the policy works as intended, special depreciation rates are no longer allowed for buildings. The definition of "temporary building" has also been amended.
• The new rates apply from the 2012 tax year (i.e year ending 31 March 2012)

These changes have a particular impact on the following areas:

• Transitional Rules for Commercial Buildings Acquired Before 2012 Tax Year
  
  What happens if you bought a commercial building before the 2012 tax year and it included a significant portion of fit-out not scheduled separately from the building? IRD has introduced a transitional rule allowing a deduction for building fit-out that is included in the tax book value of certain buildings. This is by way of creation of a fit-out pool, which can only be done during the 2012 tax year.
• Commercial Buildings Acquired After the Start of 2012 Tax Year
  
  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
• Residential Rental Property Acquired Before 2012 Tax Year
  
  If you acquired a residential rental property before 1 April 2011, building depreciation changes are likely to have an impact on you. Although there will no longer be a depreciation allowance on the residential rental property itself, any separately scheduled chattels can still be depreciated at the prevailing rates.
• Residential Rental Property Acquired After the Start of 2012 Tax Year
  
  Although you cannot claim building depreciation from the beginning of the 2012 tax year, the common notion that you can no longer claim any depreciation on your rental properties is not the case. Whilst building depreciation rates have now been set to 0%, depreciation is still allowed on all chattels.

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