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Changes to the depreciation regime arose from an officials' paper released in July 2004. The proposed changes were announced in the May 2005 budget.

Since the budget the Finance and Expenditure Select Committee has been reviewing the Bill. The process was drawn out due to the election in the middle of the process. The Committee has now made its recommendations back to parliament on the Bill and the recommendations have been accepted, the Bill passed through its final stages in Parliament on 22 March and it received Royal assent on 3rd April 2006.

The changes are as follows

Please note that where Plant and Equipment is referred to in the following text it equates to rental property Fit-out and Chattels.

Plant and Equipment purchased prior to 1 April 2005 and for buildings prior to 19 May 2005.
There is no change to the depreciation rates for these assets.

Plant and Equipment purchased after 1 April 2005.
The new formula for calculating the depreciation rates is known as a double declining balance. For plant and equipment with a short life basis this will increase the depreciation rate to apply. The effect of this to the investor is as the item is depreciated quicker they will get the use of this money sooner.

Note the Committee made one change that is intended to make this transition easier and reduce costs for tax payers with assets already purchased in the 2005-06 income year (they will not have to re-enter the new depreciation rates). The option is that the taxpayer may use the old depreciation rates for plant and equipment acquired in the 2005-06 income year and that the new depreciation method only be required for plant and equipment acquired from the beginning of the 2006-07 income year.

Buildings Purchased on or after 19 May 2005.
These buildings are subject to a new (decreased) depreciation rate. This rate is to apply from the 2005-06 tax year and subsequent years. Although the rate has decreased over the long term you will still be able to obtain the same amount of depreciation out of the building, it will just take slightly longer.

What if I had a binding contract to purchase in place before 19 May? Note if there was a binding contract for purchase or construction in place before 19 May 2005 then the rates to apply are:

Plant and Equipment : as if acquired before 1 April 2005.
Building : as if acquired before 19 May 2005.

Limited recognition for Associated Party transfers.
One change from that announced in the budget is that, in very limited circumstances, where buildings are transferred between associated parties after 19 May 2005 the current depreciation rates would apply. The only circumstances where this can happen are:

• Companies - transfers between companies that are 100% owned companies;
• Individuals - transfers of relationship property between husbands and wives or de facto partners (including same sex partners)

Change to the low value asset threshold.
This has been increased from $200 to $500 for items acquired on or after 19 May 2005. This allows a higher immediate deduction if the expenditure is a capital cost.

The Rates

The building depreciation rate has been reduced from 4% Diminishing value to 3%. - This is a 25% reduction and if an apportionment is not completed for an investment property this will have a major impact. The good news is that the rates for Fit-out and chattels have increased so some of the reduction in building depreciation can be offset. The following shows what the old and new rates are for Plant & Equipment (Fit-out and chattels)

Examples - what does it mean to our cash flow?

When you compare the depreciation using the old and new rates it actually means very little.

It isn't really worth worrying about!

There is still one unanswered question!

What items of Fit-out will IRD allow to be separated from the building structure?

Well this is a question that we have been searching for answers on for many years. When the officials paper was released in July 2004 it sought responses to many questions such as how building fit-out should be dealt with for investment property as well as the proposed rate changes to 3% for buildings and double declining for Plant and Equipment. In the 2005 budget the rate changes were announced and this is what we are talking about in this article. There was no mention of the building Fit-out issue.

There is still confusion over this and I am again pressing for answers. The Finance and Expenditure select committee that reviewed the Bill has also agreed to follow up on the building fit-out issue for me. I wrote to them in February explaining the situation and I have recently had a reply that they are looking into it and hope to have it resolved for us shortly. I have also written to a very prominent politician who is personally following up on the issue for me.

Hopefully we will have some answers on this one soon.

In the meantime happy investing and if you do incur issues with IRD over depreciation please let me know.

Steve Tucker
Managing Director
Valuit Asset Appraisals Ltd