Budget 2010 had two important decisions that impact the depreciation rules affecting residential rental property investors.
The first was withdrawal of depreciation deductions on buildings with an estimated life of 50 or more years. The reasoning behind this decision, which takes effect on April 1, 2011, was that value of buildings appreciated over time.
The second was discontinuance of 20% loading allowance for depreciation of new assets, which came into effect on May 20, 2010.
Although these decisions may discourage some investors, they would still be able to claim depreciation on chattels and items. which do not form part of the building.
Investors and taxpayers must henceforth allocate or apportion the cost of purchase of residential rental property over the land, buildings, and Chattels.
Inland Revenue Department (IRD) has issued guidelines and a three-step process that would help taxpayers determine the part of property that would be allowed for depreciation.
Step 1: Determine whether the item is in some way attached or connected to the building. If it is completely unattached, it will not form a part of the building. An item will not be considered attached for these purposes, if its only means of attachment is being plugged or wired into an electrical outlet (such as a freestanding oven), or attached to a water or gas outlet.
Step 2: Determine whether the item is an integral part of the residential rental property, such that a residential rental property would be considered incomplete or unable to function without the item. If the item is an integral part of the residential rental property, then the item will be a part of the building.
Step 3: Determine whether the item is built-in, attached or connected to the building in such a way that it is part of the “fabric” of the building. Consider factors such as the nature and degree of attachment, the difficulty involved in the item’s removal, and whether there would be any significant damage to the item or the building if the item were removed. If the item is part of the fabric of the building, then it is part of the building.
Pluming, piping, electrical wiring, internal and external walls, internal and external doors and kitchen cupboards are part of the building and hence not depreciable.
However, carpets, curtains, blinds, freestanding wardrobes and cupboards would be considered not as part of the building and hence depreciation can be claimed on these items. Similarly, hot water cylinders and water heaters will be allowed to be depreciated as separate items as they are generally attached to power source and water source.
Prior to the issue of Interpretation statement, submissions were made to the exposure draft issued by IRD.
One of them highlighted the fact that the economic life of building parts differed and hence should be treated as separate items of depreciable property.
However, IR Commissioner believes that despite their differing durability, parts of a building are not separately depreciable.
He said it was important to answer, “What is the item of depreciable property?”
In the light of the three-step test, taxpayers should classify items such as chattels as separate, since they can claim depreciation allowance.
Vijay Talekar is Director, Tax Experts Limited (Chartered Accountants), based in Auckland. The above article should be considered only as a guideline and not specific advice. Mr Talekar absolves himself along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.
