to a special edition of Valu in Review. This is a brief update on changes announced to depreciation rates by the Government.
 

Changes to the depreciation regime arose from an "officials" paper released in July 2004. The changes were announced in the May 2005 budget. The changes to the relevant legislation are encompassed in the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Bill.

Since the budget the Finance and Expenditure 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. The recommendations have been accepted and the Bill passed through its final stages in Parliament on 22 March. It received Royal assent yesterday (3 April 2006).

Please note that from a property investment perspective where the term "Plant and Equipment" is referred to in the following this equates to rental property fit out and chattels.
 

There is no change to the depreciation rates for these assets.
 

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. For those items of plant and equipment with a longer life expectancy the depreciation rate will not change. For an example of the new rate changes see our website (www.valuit.co.nz/currentissues_july2005.asp).

Note the Committee made one change that is intended to make this transition easier and reduce costs for taxpayers 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.
 

These buildings are subject to a new depreciation rate (previously 4%, now to be 3%). 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 from the building, it will just take slightly longer.
 

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.
 

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)
 

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 information contained in Valu in Review is of a general nature and is not intended to address the circumstances of any particular individual or entity. Valuit recommends prior to any person submitting figures to IRD, professional advice from a property accountant, and/ or other professionals is sought. Valuit endeavour to provide accurate and timely information, however there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.