Commercial Property

IMPORTANT – “SALE/PURCHASE PRICE ALLOCATION”

From 1 April 2021, a vendor and purchaser may need to include an allocation between LAND (Non-depreciable Property) and IMPROVEMENTS (Depreciable Property) within the sale and purchase agreement.

Depreciation rules are always changing and this rule requires you to agree to additional information within the Sale and Purchase Agreement.  In its simplest form you will be required to agree on the allocation between LAND (non-depreciable property) and IMPROVEMENTS (Depreciable Property) within the agreement. The allocation will be used to determine the “closing book value” of improvements for the vendor and the corresponding “opening book value” of improvements for the purchaser.

Our Key Points to note

  • Allocation for the sale of a property is only required to show an allocation between Non-Depreciable property (Land, and building structure for residential) and Depreciable property (Improvements) NOT a detailed list of individual depreciable items.
  • A purchaser will be able to further split the “Depreciable Property Value”, agreed upon within the allocation, into the relevant IRD depreciation categories and IRD depreciation rates to accurately reflect the depreciation claimable during ownership.
  • Any allocation must be based on relative market values for all the assets. Inland Revenue may challenge an allocation if it believes it does not reflect market values.
  • If the seller chooses the allocation, it must allocate at least tax book value to depreciable property and values to other taxable property such that the seller recognises no loss on the sale.
  • If the parties agree an allocation, they must follow it in their tax returns.
  • If the parties cannot agree an allocation, the seller determines the allocation, and notifies both the buyer and Inland Revenue within 2 months of the change in ownership of the assets.
  • If the seller does not make an allocation within the 2-month timeframe, the buyer must determine the allocation, and notify both the seller and Inland Revenue of it.
  • The purchase price allocation rules will not apply to a transaction if the total purchase price is less than $1 million, or the buyer’s total allocation to depreciable property (Improvements) is less than $100,000.

NOTE: this is an overview of the changes ONLY. Please take direction on the specifics in relation to the eligability and specific rules in relation to your property from your Accountant.

The calculator below utilises the IRD formula to calulate the ALLOCATION between “LAND” and “DEPRECIABLE PROPERTY”.

  • Calculator - "Sale/Purchase Price Allocation"

    Please fill in the 3 calculator fields below. Once completed the results will appear on the right side.
  • Excluding Business Assets such as, separately identified plant and equipment, trading stock, financial arrangements, goodwill and so on.
  • As specified on RATING VALUATION or REGISTERED VALUATION
  • As specified on Valuation (as utilised above)
  • Results - "Sale/Purchase Price Allocation"

    To be incorporated into SALE and PURCHASE AGREEMENT. COMMERCIAL Property ONLY
  • Excluding Business Assets such as, separately identified plant and equipment, trading stock, financial arrangements, goodwill and so on.
  • (Include within the Sale and Purchase Agreement)
  • (Include within Sale and Purchase Agreement) Excludes Business Assets such as, separately identified plant and equipment, trading stock, financial arrangements, goodwill and so on.

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Understanding Commercial Property Depreciation

More than any other type of property – t’s all about cashflow

There have been plenty of changes to depreciation rules and many property owners mistakenly believe that with the changes announced in the 2010 budget, specifically the depreciation rate on buildings reducing to zero, that there will be no depreciation deductions available for their property. While this was true for the “building”, depreciation was still available on the “fit-out” component of the property as well as “plant & equipment”.

During COVID in 2020, further changes were made and we saw the re-introduction of BUILDING DEPRECIATION for commercial properties.

So to claify, as at today you can claim depreciation for commercial properties as follows;

  • Building Structure (Re-introduced during COVID pendemic)

AND you are still able to claim depreciation on building fit-out, which includes but is not limited to items such as:

  • Partitions
  • Electrical Reticulation
  • Plumbing
  • Light fittings
  • Floor coverings
  • Lifts
  • Air-conditioning
  • Fences
  • Roller doors
  • Fire alarm systems

and much more.

Many commercial property owners have not elected to, or have been advised against, claiming full depreciation entitlements in the past and therefore have no separation of items within the property depreciation schedule.

You now have a decision to make as to how you claim depreciation going forward.

For new purchases a full depreciation apportionment is critical or you will not be able to claim any depreciation.

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