Are you making the most of what you're entitled to?
Background
The 2010 Budget introduced changes to the depreciation rate of buildings, and the ability to depreciate ‘buildings’ was removed from the 2011-2012 tax year. The annual depreciation rate for ‘buildings’ (i.e. the building structure) was set to 0.0% if they have estimated useful lives of 50 years or more, as determined by the Commissioner of Inland Revenue. The ability to claim depreciation on ‘fitout’ remained, however.
Reintroduction of depreciation on buildings
As part of the $12.1 billion business continuity package aimed at assisting businesses through the COVID-19 situation, the ability to claim depreciation on the building structure at a rate of 2.0% diminishing value has been reintroduced.
Depreciation provides a mechanism to recognise the economic decline in value of an asset. As a result, depreciation is essentially an expense and therefore reduces taxable income, improving cashflow.
Building vs fitout
Although the ability to depreciate the building at 2.0% may sound appealing, depreciating the ‘fitout’ separately to the building will likely be more beneficial financially. IR265- General Depreciation Rates, as published by IRD, outlines over 90 fitout components that can be depreciated including:
Air-conditioners, ventilation and heat pumps
Alarms (burglar and fire alarm systems)
Carpet and vinyl floor coverings
Non-load bearing partitions
Lifts
Light fittings
Plumbing and electrical reticulation
Suspended ceilings
Roller doors & motors
Carparking pads
Hardstandings
- Air-conditioners, ventilation and heat pumps
- Alarms (burglar and fire alarm systems)
- Carpet and vinyl floor coverings
- Non-load bearing partitions
- Lifts
- Light fittings
- Plumbing and electrical reticulation
- Suspended ceilings
- Roller doors & motors
- Carparking pads
- Hardstandings
The depreciation rates for fitout are typically significantly accelerated over the structure rate of 2.0%, reflecting the reduced useful life of the components. In essence, more depreciation can be claimed against these assets annually.
How does it work
The property purchase price must be apportioned between non-depreciable land, the building structure and depreciable fit-out by means of a market valuation. That is where valuers come in with the following process:
- The land is first valued to determine the residual value of improvements (if any)
- The residual value of the improvements is then apportioned into:
- The opening book value of the fit-out items; and,
- The building structure
- The opening book values are reported line by line for future depreciation calculations.
An example, of an historic office building that sold recently, is as follows:
Noting the above calculation, we have considered the impact of claiming depreciation on the building only versus claiming depreciation on the building and fitout; this is summarised below
Claiming depreciation on the fitout in addition to the building results in a tax benefit for the first full year of $18,592.
Note, however, that the benefit will continue for the remaining life of the fitout components. Annual depreciation with reference to the above example is illustrated below: