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Inland Revenue

Tax Policy

Treatment of depreciation

Clauses 34, 547 and 616


(Matter raised by officials)

The words “depreciation loss” should be added after the word “expenditure” in the general provision that determines whether an allowance is non-taxable (section CW 17) to ensure that allowances that provide for some element of depreciation are not precluded from being non-taxable.

Equivalent changes should be made to the 1994 and 2004 Income Tax Acts.

Up to the date of assent, however, these changes should apply only in relation to past positions taken.


Many employees use assets that they own during the course of their work. Employers often provide allowances to reimburse employees for the costs associated with the use of these assets for work purposes. Tool allowances and mileage allowances are prime examples. Arguably part of the reimbursement relates to the depreciation of those assets.

The main provision in the Income Tax Act determining whether allowances are non-taxable, section CW 17, refers only to payments to cover expenses. The Income Tax Act treats depreciation as a capital loss rather than as an expense. Accordingly, there is an issue as to whether the wording in section CW 17 adequately covers all elements that an allowance might cover. To remove this doubt, officials recommend that section CW 17 should refer to both “expenditure” and “depreciation loss”.

Given that the changes in relation to relocation payments and overtime meal allowances are being backdated to the 2002–03 income year, similar changes to incorporate “depreciation loss” should be made to the equivalent provisions in the 1994 and 2004 Income Tax Acts.

Up to the date of assent, however, these changes should be confined to past positions taken, to ensure that only those taxpayers that had genuinely included a depreciation element in their allowances would be able to utilise this change.


That the submission be accepted.