The Inland Revenue Department recently introduced new rules about depreciation deductibility for commercial property that became effective on 1st April 2024, which have not been widely published.
Key features of the amendments are:
- They set the depreciation rate at 0% for all buildings with an estimated useful life of 50 years or more. This will ensure that buildings remain depreciable property and historical depreciation deductions will remain recoverable when calculating depreciation recovered on sale of the asset.
- Regardless of when the building was purchased, if the original useful life and not the remaining useful life exceeded 50 years, the 0% depreciation rate applies.
- The Commissioner no longer has the ability to set special depreciation rates for long lived buildings.
- Owners of buildings acquired before the 2010-2011 income year can deem up to 15% of the adjusted tax value as cost of fit out, and continue to depreciate the fit out separately.
In summary, the depreciation rate for commercial building has been reduced to 0%, which is the same rate as prior to April 1, 2020.
Buildings including fit out purchased after that date have been depreciated collectively. As a result, fit outs have been depreciated at a much lower rate. The new rules allow owners to apply to the commissioner to separate the fit out and depreciate separately. This will enable previously filed tax returns to be reassessed.
For commercial property purchased before the 2010-2011 financial year, owners can now record up to 15% of the building book value as fit out and depreciate the fit out accordingly. For commercial property purchased after 2010-2011 and before 2020-2021, no adjustment is available. For commercial property purchased 2020-2021 to 2023-2024, owners that choose to depreciate the fit out as part of the building can make an application for the fit out to be depreciated separately. For property acquired after 1 April 2024, the fit-out allocation will be as determined in the Purchase Price Allocation on the Sale and Purchase agreement.
It is most important that the reassessments are carried out to ensure that when the current owners of the property sell, there is a value of depreciable property that can be passed on to the incoming owner in accordance with the purchase allocation rules that were introduced in 2021. If you require advice regarding these depreciation changes, please contact your Client Manager.
