Transitional Rules for Commercial Buildings Acquired Before 2012 Tax Year

 
Grange Associates Ltd - 27 February 2012

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.

The rule only applies to owners of commercial buildings who acquired a commercial building in the 2011 or earlier tax years and did not itemise the commercial fit-out separately.  Any subsequent commercial fit-out acquired and separately depreciated after the date that the building was acquired, but before the beginning of the 2012 tax year, reduces the amount of the available fit-out pool.

The fit-out pool is calculated as 15% of the building’s adjusted tax book value at the end of the 2011 tax year, less the adjusted tax book value at the end of the 2011 tax year of any fit-out associated with the building that has been separately depreciated.

If the tax book value of the separate fit-out is in excess of the 15% of the building’s tax book value, no pool can be created.

You are only permitted to elect to create the fit-out pool in the 2012 tax year.

When the building is sold, there are no loss or recovery rules applied to the value of the fit-out pool.

Example 1

A company owns a commercial building that they purchased in April 2007 for $850,000 including fit-out, which was not itemised separately at the time. 

They then purchased additional fit-out in April 2009, which they have scheduled and depreciated separately.

As at 31 March 2011, the tax book value of the building was $765,000 and the additional fit-out has a tax book value of $75,000.

So, the starting fit-out pool value is:

(765,000 x 15%) – 75,000 = $39,750

The annual depreciation deduction, while the building is still owned is:

39,750 x 2% = $795

Example 2

Using the above example, but assuming the additional fit-out had a tax book value of $120,000 as at 31 March 2011, the results would be:

(765,000 x 15%) – 120,000 = (5,250)

Because the result is a negative figure, no depreciation fit-out pool can be created.

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