At this stage there is not really anything we did not expect, a few items will have the depreciation rates returned to 3%. It will be interesting to see the full "Interpretation Statement" once it is released by IRD.

Inland Revenue confirms stand on depreciation 29 May 2006

Inland Revenue advises that it considers it is unacceptable for residential rental property owners to break up their properties into smaller components in order to get higher depreciation rates for tax purposes.

"In the past, we have disallowed the higher depreciation claims and, after consideration by the Adjudication and Rulings business group, we continue to believe this practice is not acceptable," says Naomi Ferguson, Deputy Commissioner Service Delivery.

"Property owners are still able to depreciate chattels such as carpets, drapes, light fittings, whiteware and so on, as separate assets. There is also provision to depreciate separately items such as water heaters, clothes lines and other fittings that are not part of the building," says Miss Ferguson.

The items that Inland Revenue does not believe to be separate assets are internal walls, doors, electrical wiring and plumbing and so on, as well as furniture and fittings that are permanently attached and are regarded as being part of the building. These include items such as kitchen cupboards, bathroom vanities and built-in wardrobes.

Some residential property owners have been splitting these components out and depreciating them as separate assets in order to take advantage of higher depreciation rates listed under the "Building fit-out (when in the books separately from building cost)" asset category.

"Property owners who have been splitting these components out from the cost of the building will have overstated their depreciation claim in the past, but we won't be asking them to adjust previous years' income," says Miss Ferguson. "However they will be required to add the value of the various 'components' they have been depreciating individually into the cost of the building, and combine the depreciation claimed for those individual assets."

This will identify the asset to be depreciated, the cost of that asset and the depreciation claimed to date. The building should then be used to claim depreciation at the correct rate. This will depend on the type of building and when it was acquired.

Property owners with cases still under investigation or going through the disputes process may be able to apply this approach from the first period not under dispute or being investigated. "A tax payer may, of course, decide not to settle and to take the matter through the disputes process if they do not agree with the Commissioner's treatment," says Miss Ferguson.

An Interpretation Statement on this ruling is being prepared for public consultation.

Source : www.ird.govt.nz

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