Depreciation Update - February 2005.

Submissions for the review of the depreciation regime closed on 30 September 2004.

Other than a confirmation from the IRD that they had received our submission we have not heard how the depreciation review is proceeding.

With 31 March approaching some direction will needed to be provided by the IRD and we await this.  In the meantime here are some questions and answers that have been asked by our clients.

Should we still get a chattel valuation completed on property we have purchased this year?

Yes.  Under the review the IRD are looking to change some depreciation rates (both increase and decrease various rates) on some categories. The IRD are not looking to stop investors from claiming depreciation.

On what items should we be claiming depreciation?

The IR 260 and IR 264 tax guides detail what depreciation can be claimed on various assets.  In the Discussion Document issued by the IRD they mentioned possible categories that may have their rates reviewed.  Until a definitive decision is provided by the IRD we strongly recommend that you consult with your tax advisor/ accountant prior to submitting your tax return.

On what basis should our tax return be filed?

We strongly recommend that you consult with your tax advisor/ accountant prior to submitting your tax return.  Them following is from advice that Valuit received from the IRD and posted on our website in April 2004.

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 Valuit's 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.