Asset identification guidance finalised - so what does make a computer, a computer?

By Hiran Patel & Navroz Singh

Back in July 2024, Inland Revenue released for consultation a draft interpretation statement on how to identify the relevant item of property when applying the depreciation rules. Our August 2024 Tax Alert article reviewed the consultation document. The Interpretation statement has now been finalised by Inland Revenue and the final document provides useful guidance (with a number of helpful examples) for taxpayers when identifying the depreciation treatment of those tricker assets, like those pesky computer mice (or is it mouses?).

As a reminder, a relevant item of property must be identified to determine if it is a depreciable item and, if so, the applicable depreciation method and rate, from which the amount of depreciation loss is calculated. In some cases, this consideration determines if the item of property meets the low value asset threshold to qualify for an immediate deduction in the year of acquisition.

As such, when a new asset is acquired, the first consideration should be if the asset is its own separate asset or if it forms part of a larger asset. The focus is on identifying a physical thing that satisfies a particular notion. That is, whether the asset is something that is an entirety by itself, and not a subsidiary part of anything else.

So, what is new?

In the final version of the interpretation statement, Inland Revenue have provided further guidance on relevant considerations for when an item of property “is part of an integrated system”. In particular, Inland Revenue have emphasised that this is only one of a number of factors to be considered and is not solely determinative in the analysis of what is an item of property for depreciation purposes.

This clarification highlights the interaction of certain components of an asset, and how these components interact can sometimes dictate whether there is one or multiple assets. In the context of the computer example discussed in our previous article, Inland Revenue have clarified that there might be circumstances arising that would indicate that the integrated system is less important in identifying the relevant item of property.

The guidance discusses a situation where a touchscreen laptop is purchased as part of a package with a keyboard and mouse as it was cost-effective (Example 3). In this case, if the keyboard and mouse were going to be used separately (and potentially with other computers), there is no integrated system due to the distinctiveness and completeness of each individual item. On this basis, there is less weight given to the integrated system test.

Interestingly, in this example, if an additional screen is purchased, the guidance indicates that this would be treated as a cost to the package (as it is an improvement to the asset), rather than as a separate item of property (and likely prevent an immediate write-off under the low value asset rules). This demonstrates the fine balance in determining what is the relevant item of property.

Another example in the guidance (Example 1) discusses whether a utility vehicle and trailer are separate items of property. In this example the trailer allows the vehicle to perform a specialist purpose, suggesting that the two are separate items of property, despite the trailer not being able to perform its function to transport items without the vehicle.

Low value assets

Our August 2004 article highlighted the complexity around the application of s EE 38 of the Income Tax Act 2007 which gives the ability to obtain an immediate write-off for low value assets (the low value asset threshold being $1,000, which has not changed since 2021). The key issue being that if something forms part of another asset, the low value asset write-off will not apply even if the item costs less than $1,000. Taxpayers will need to continue to document their approach to implementing s EE 38 when acquiring new items of property (for example, what checks are taken to determine whether an item is part of a larger asset).

While Inland Revenue have made some clarifications and expanded examples in the final document, it remains clear that whether an item of property should be capitalised or immediately expensed is not a decision that can be made solely on the monetary value of the asset. Given this complexity contact your usual Deloitte advisor with any depreciation questions you may have.