From 1 April 2024, the Government reintroduced a 0% depreciation rate on commercial and industrial buildings. However, tax deductions for depreciation on commercial fit-outs still remain.
As we are now in the swing of preparing 2024-2025 accounts, we are starting to see the practical flow-on effects of this. We thought it was worthwhile sharing some points you may need to consider if you own commercial buildings.
The 0% rate ensures buildings stay under the depreciation rules, meaning any gain on sale could trigger depreciation recovery income on prior. Consider this if you own commercial property.
What Does This Mean For Your Taxable Income?
With depreciation deductions denied from 2025, commercial property owners can expect higher reported profit and taxable income in year-end accounts.
Fit-Outs: Still Depreciable?
Yes, fit-outs may be depreciated if properly identified or valued, depending on your situation. Here's a quick guide depending on the time the commercial building was purchased:
1. Purchased pre-31 March 2011, a new section DB 65B calculation is likely to apply *(see below).
2. Purchased after 1 April 2011, and the fit-out was separately identified then, there may be no issue.
3. Purchased post-1 April 2011 and pre-1 April 2020, and you did not separately identify the fit-out, tough luck.
4. Purchased from 1 April 2020 to 31 March 2024, but fit-out was not separately identified. A market valuation should be attained for the fit-out to depreciate it going forward.
What Is DB 65B?
Section DB 65B* introduces new rules from the 2024–25 year. It applies to commercial buildings acquired before the 2010–11 tax year where:
· No separate fit-out was identified or depreciated at the time of purchase, and
· You wish to claim depreciation on the notional fit-out portion of the building.
You need to perform the DB 65B calculation if all the following apply:
1. The building is commercial (not residential).
2. It was acquired before the 2010–11 tax year.
3. The building is still held in the 2024–25 year.
4. You want to claim depreciation on an estimated fit-out portion (since no fit-out was itemised initially).
The notional fit-out is 15% of the building’s adjusted tax value at 2010–11, less any previous fit-out deductions, imputed deductions (for 2021–2024), and the new DB 65B claims.
Purchased During Covid Relief?
If your building was acquired between 2020 and 2024 (ie, with Covid relief commercial building depreciation deductions available), and the fit-outs were depreciated as part of the building (not separately), it may be worth requesting an amendment with IRD based on the market value of the fit-out. If the fit-out items were already separately capitalised and depreciated, you can continue using standard depreciation rules.
Review Your Assets
Review your assets and depreciation schedules to ensure compliance. Provisional tax may need adjusting. If you’re unsure how this affects your property, get in touch with us. We can assist with DB 65B entitlements, valuations, IRD applications, and maximising future claims.
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.
JOHNSTON ASSOCIATES, Level 1, One Jervois Road, Ponsonby, T: 09 361 6701, www.johnstonassociates.co.nz
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