Depreciation rate change affects tax payment

Budget 2010 changed depreciation rates of buildings to 0%, applicable to all buildings, despite their date of purchase.

An analysis of the New Zealand building price data over the last decade indicated that the values of buildings were actually rising.

The economic environment in the property market also proves that properties, which include buildings, have increased in value drastically over the last seven to eight years.

Earlier, buildings with an estimated useful life of 50 years were depreciated at 2% for tax purposes. Taxpayers, who had claimed deductions for depreciation on buildings, will have to pay depreciation recovery if their property is sold at a value higher than the book value in the fixed asset schedule.

The depreciation rate for items used in the building remains unchanged; they are to be depreciated separately at different prescribed rates.

However, items that form part of the building such as plumbing, electrical fittings, internal walls, external and internal doors are to be depreciated at a flat rate of 0% as well.

The Residential Rental Properties Depreciation of Depreciable Assets (IS10/01) outlines items that form part of buildings and those that are in the buildings such as curtains, blinds and hot water cylinders.

These are to be depreciated separately.

The changes to the rate of depreciation for building do not affect the deductibility of repair and maintenance expenses incurred for buildings.

Buildings have many sections. Repairing or replacing a part of the building that does not significantly change the structure of the building or adds value is normally deductible.

It must be noted that only the depreciation rates of buildings have changed to 0% but the rates for the structures have not changed.

A building as per Interpretation Statement (IS) 10/02 is defined as a structure that has walls and a roof.

The amendments to Sections EE 31, EZ 13 and EZ 14 of the Income Tax Act 2007 will apply from the beginning of 2011 (12 month-income year).

For most taxpayers with the balance date of March 31, the changes would be effective from April 1, 2011.

Taxpayers with an early balance date must comply with the changes from October 2, 2010.

Shobna Gounder is Senior Associate at Levi Chartered Accountants Limited based in East Tamaki, Manukau, Auckland. Email:

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