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IMPORTANT NOTICE - APRIL 2004

VALUIT OBTAIN DIRECTION ON DEPRECIATION FROM IRD.

You may have become aware recently of murmurs in the media over potential changes to the depreciation regime. This has come as a result of a case that is currently being reviewed, between an investor and IRD. Valuit is assisting the investor's accountant in this case and we are working to get the issues resolved.

I have a column in the April KPI magazine which you may like to read but be aware we have made further progress since this article was written.

What are the proposed changes?

A local Auckland IRD office has raised a question over the interpretation of the depreciation regime and is arguing that items such as Electrical reticulation, Plumbing and other Building Fit-out items should not be allocated the higher depreciation rates as published in IRD publications. Instead these items should depreciate as part of the building structure at 4%.

Valuit has no objection to change, as change is a sign of progress. However the change must be for the right reasons. Since being involved in this case I have undertaken considerable research on how the depreciation regime is currently being utilised. I have seen areas that do need change but I believe the proposed IRD changes are the wrong changes and will cause confusion around the whole issue of depreciation.

What will these potential changes mean?

Some depreciation rates may decrease to 4%. This will not have a major impact on most investors. It will however reduce your short-term depreciation claim. If your plan is to hold the property long term it will simply mean that you will have a higher depreciation claim later in ownership. This change simply defers the claim to later in ownership.

Will we be penalised for what we have done in the past?

I believe not. In the case that I am involved in and subsequent clients that have had questions asked, penalties for an unreasonable interpretation have been waived. The interpretation that Valuit has been working to, is held by almost every professional that we have spoken with since the introduction of the new depreciation regime in 1993. We believe the IRD will struggle should they decide to penalise everybody, I'm sure this will get many thousands of people up and jumping. We also have correspondence from IRD accepting that their publications are unclear, infact the publications give no support to their interpretation, hence why we are all currently claiming depreciation as we are.

Where to from here?

In January this year I wrote to the IRD Commissioner asking for direction over how we should be claiming depreciation prior to a final ruling being made. The response from the IRD can be summarised as follows:

They have no indication as to when his may be resolved; it has already been in progress for several years. Therefore as investors we cannot simply ignore the issue of depreciation until a final ruling is made.

The local offices of the IRD have been directed to wherever possible avoid assessing cases until IRD head office have been able to complete a review of the issue of building fit-out being claimed at the published rates by residential property investors. If an assessment must be made the local office have been directed to use the 4% Building rate for items of Fit-out and investors will be able to request a reassessment should the decision go in favour of the current interpretation.

What should be included in 31 March tax return?

IRD has also given advice on this. They provided three options as follows:

OPTION 1
File their returns on a conservative basis (as per the advice set out in our IR 263 booklet) and wait for IRD head office to complete their review

OPTION 2
File their returns on a conservative basis and follow the disputes resolution process issue a Notice of Proposed Adjustment to the Commissioner;

OPTION 3
File their returns based the interpretation that has been held in the past. However you should be aware that unlike the first two options, this choice may expose taxpayers to the possibility of having shortfall penalties imposed. (Note: This is not a misinterpretation penalty and as mentioned above I believe IRD will have a hard time penalising all investors.)

Which option to use?

As Valuits expertise is in apportioning the purchase price and we are not accountants we have always advised that you to seek advice from a specialist property accountant prior to submitting any tax returns, and now is no different.

We have also notified a large number of accountants of the current situation and they will need to make an informed decision as to how they wish to treat this. Many do not see this as a major issue and the Accounting Institute would not at this stage, appear to have alerted their members or given any direction on this. Of the accountants we have had dealings with most would appear to be going for option 2 and 3.

I hope this helps clarify the confusion for you. Keep an eye on our website as we will be adding a section to keep you up to date with progress. We will also send you an email if there are any major developments.

Regards

Steve Tucker
Managing Director
Valuit Asset Appraisals Ltd