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The removal of tax depreciation on non-residential buildings

Tax Alert - September 2023

By Iain Bradley & Denise Hodgkins

When the Labour Party first announced that part of its 2023 Election Tax Policy included a proposal to remove GST from fruit and vegetables, many people might have missed the fine print which noted this would be funded by removing the ability for businesses to claim depreciation on commercial buildings. When the National Party announced its 2023 Election Tax Policy, it was very clear the tax cut promises would be funded by additional taxes, and it was very clear that removing depreciation on commercial buildings was part of the equation.

Given that both of the major parties have announced the removal of tax depreciation, it is highly likely that the policy will be enacted, in some form, following the election on 14 October 2023.

If elected, the National Party tax package has this change taking effect from the 2024/25 income year. For Labour, this change was announced as part of a wider policy to remove GST on fruit and vegetables, which is expected to come into effect from 1 April 2024, so it is fair to assume that the depreciation change would take effect for the 2024/25 income year (or later) under a Labour government as well.

Although we do not yet know the precise details of the likely removal of tax depreciation on non-residential buildings, we do know that the tax, financial reporting, and other commercial implications of the change will be significant. We have seen this movie before.

When the removal of tax depreciation on buildings was announced back in Budget 2010, this was a significant and sudden change and it brought with it a number of complications for businesses to work through.

Many of the same issues will now need to be revisited. Here are 10 issues to think about if you are currently claiming tax depreciation on commercial buildings (or if you might purchase a commercial building in the future):

  1. What is the meaning of a “building” and is your building caught by the removal of tax depreciation on non-residential buildings?

  2. Have you split out the fit-out from the building structure when recording the commercial building in your tax fixed asset register? Have you got support for the split out and the values used?

  3. How will the removal of tax depreciation on commercial buildings impact your decision to acquire a building? Does the decision made need to be revisited and does your view on price and/or willingness to purchase change?

  4. What will the cash tax impact be for your organisation from the removal of tax depreciation on commercial buildings?

  5. When is the removal of tax depreciation effective from and when is the change going to be enacted or substantively enacted for the purposes of determining the first set of financial statements that the deferred tax and tax expense impact will need to be reflected in?

  6. What is the likely quantum of the adverse deferred tax and tax expense impact on your financial statements? This could depend on when the buildings were acquired and whether or not the initial recognition exception applied to the building.

  7. Is the building an investment property where the rebuttable presumption that the carrying value will be recovered through sale has not been rebutted? The answer to this question could significantly alter your deferred tax outcome.

  8. What are the implications of the deferred tax liability increase on banking covenants or thin capitalisation (interest deductibility) calculations?

  9. How will the initial recognition exception apply to new buildings acquired or additions to existing buildings?

  10. How will you determine whether future expenditure on your building is deductible repairs and maintenance or, instead, capital improvements that will now be non-deductible, non-depreciable “blackhole” expenditure?

For many taxpayers, the implications of the removal of tax depreciation on commercial buildings will be significant. Please contact your usual Deloitte tax advisor if you would like to discuss the potential implications for your organisation.

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