Depreciation Post 2010 Budget
The budget announced some significant changes to the rules on depreciation.
What is depreciation?
Depreciation is a tax deductible expense which allows for the general wear and tear of fixed assets owned by a business. The rate of depreciation for each type of asset is outlined by the Inland Revenue Department.
Here is a brief summary of the changes. For more information on how these changes impact you please give us a call.
- The removal of the 20% loading on new assets
Prior to the budget the rate of depreciation set for a brand new asset was 20% higher than the rate applied to the same asset if you purchased it second hand.
That’s now gone……………………….
For assets purchased after the 20th May 2010 the same rate of depreciation applies whether the asset is brand new or second hand.
Those new assets purchased prior to 20 May 2010 which have the 20% loading can continue to be depreciated at that rate. But any improvements made to those assets after budget day will have to be recorded separately and will not have the additional loading added to their depreciation rate. There are some exceptions, so if you are unsure give us a call.
- Some Buildings just don’t Depreciate !!!!
Generally buildings can be depreciated each year at 3% of their book value or 2% of their initial cost value. Over the past few years most buildings have not depreciated in value in fact they have increased in value. However, this increased value is not usually due to the fabulous building you own which is in tip top condition, it is more to do with the increased value in land and the movement in the property market as a whole.
On budget night it was announced that from the 2012 financial year (starting 1 April 2011 if you have a 31st March balance date) the rate of depreciation on most buildings was to drop to 0%. In a nutshell, currently there is no depreciation claim for land and going forward (2012 income year onwards) there will be no claim for the building that sits on it too.
When you sell it……………
If you sell any business fixed asset including buildings for more than what it’s book value is (that is it’s cost less total depreciation claimed) then the recovery of depreciation will most likely become taxable income. Yes that means you will pay tax on any depreciation recovered so do not spend all those sale proceeds, remember the tax man!!
Given the current economic conditions many buildings may have actually gone down in value. So it only seems fair that you get a tax deduction for the loss in value right? Afraid not …. in most cases losses on buildings are not tax deductible, however if in doubt give us a call.
Do you own a residential rental property? This applies to you……
Residential Rental Properties
There has been much debate over recent years as to what forms part of a building and what bits can be separately identified. If some expenses could be separated from the actual building cost then they potentially could carry a higher deprecation rate. In line with the changes in the building depreciation rate the Inland Revenue Department have issued their interpretation statement as to what “building” means in regards to depreciation provisions.
The statement attempts to simplify this issue by adopting a three step test to determine the difference between a “building” and its “fitout”.
Step One:
Determine whether the asset is somehow physically attached to the building ie permanently attached not just plugged, wired or attached to a water or gas main.
Step Two:
If attached then decide whether the asset in question is an integral part of the building in that it would be unable to be used or be incomplete without this asset.
ie A tenant in a residential property would expect the kitchen to have a sink and the bathroom to have a shower or bath in it.
Step Three:
If the asset does not form part of step one or two then you need to look at whether the asset is attached or built into the property in such a way that it would be difficult to remove it or its removal would cause significant damage to the property.
Some examples have been listed…….
Plumbing and Piping
|
Building
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Electrical Wiring
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Building
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Fitted Furniture
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Building
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Wardrobes and cupboards not built in
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Fitout
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Carpet
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Fitout
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Lino
|
Building
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Curtains and Blinds
|
Fitout
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Non-Residential Properties
On budget night the government indicated that it would also be reviewing the same issue in relation to commercial properties. So watch this space……
As with many things in life there are always exceptions to the rules. Please ensure that you know how these changes impact your individual circumstances if in doubt please ask us.
Your accounting team at ACURA Accounting.
