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Appreciating depreciating buildings

Tax Alert - April 2022

Claiming depreciation on buildings is something that was taken for granted by taxpayers, that is until the shock Budget Day announcement on 20 May 2010 that buildings will no longer be depreciable from the 2011/12 income year. That change began many years of consternation for building owners over a range of topics including how do you depreciate fitout, how do you depreciate something which is part-coolstore and part building, is a hydro powerhouse a building, and not least, what do you do for deferred tax purposes?

Fast-forward almost a decade and there was a much more welcome announcement on 17 March 2020 that building depreciation would be reinstated for non-residential buildings from the 2020/21 income year. Over the two years since that announcement, most taxpayers have happily started depreciating their buildings again. But for some taxpayers, there were some complications to resolve, including determining what was a non-residential building (helpfully defined as “non-residential building means a building that is not a residential building”).

To help taxpayers, Inland Revenue has recently released a draft interpretation statement “Claiming depreciation on buildings”, this statement provides a very useful summary of virtually all issues arising around the depreciation of buildings – however, do refer to our insert entitled “Deferred tax confusion reigns”.

Useful points of clarification provided in the draft interpretation statement include:

  • A building will be a residential building if it is a “place used predominantly as a place of residence or abode”. The focus here is the use of the building. This will be important in situations where there is a mixed-use property as the entire building will either be depreciable or not depreciable depending on how it is used. For example, a three-story building with a shop on the ground floor and two floors of apartments will be predominantly used as a place of residence and therefore the entire building remains non-depreciable. While this approach is reasonably simple to understand, it does lead to policy questions as to whether this is the right answer, take for example two identical tower blocks, one is used for offices and the other has apartments; all aspects of the building construction are identical, but one is depreciable and one is not.
  • Residential buildings used for commercial accommodation will still be depreciable if there are more than 4 units on the same piece of land, likewise, hotels, motels, etc are all depreciable.
  • When identifying what makes up a building it is important to be aware that any plant or fit-out that forms part of the structure of the building is part of the building and is not separately depreciable.
  • Depreciation rates that apply from 2020/21 are lower than what was available prior to 2011/12. The new rates are 2% diminishing value or 1.5% straight line for buildings with an estimated useful life of 50 years.
  • The draft interpretation statement provides a reminder that if depreciation is not claimed (and an election to not depreciate the asset has not been filed with Inland Revenue), then depreciation is still deemed to have been claimed when determining whether there is depreciation recovery income when a building is sold.

Deferred tax confusion reigns

The impact of the changes in early 2020 on the deferred tax position is proving not to be an exercise that had to be undertaken solely in year one. Complexity still exists as taxpayers work through the impact on deferred tax of impairments, revaluations, additions, and part disposals of buildings where the outcome is not as straightforward as it might initially seem. We are also seeing prior period adjustments being required as tax depreciation is flowed through the tax fixed asset register, requiring an adjustment in the tax base for deferred tax.

Overall the draft interpretation statement provides a useful summary of how to depreciate buildings, submissions are open until 2 May 2022.

If you want to know more, please contact your usual Deloitte advisor.

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