1. Introduction

1.1 This issues paper discusses two different post-Budget depreciation related issues, and officials’ proposed solutions to them.

1.2 The first issue is about the depreciation of building fit-out in non-residential buildings in light of the Inland Revenue interpretation statement Residential rental properties – depreciation of items of depreciable property (IS 10/01). This statement concluded that many items in a residential rental property are part of the building and so must be depreciated at the building depreciation rate.

1.3 Although the statement applies only to residential buildings, its principles could be interpreted to apply more broadly. This has created some uncertainty. It seems that the current practice is for taxpayers to generally claim depreciation deductions for items of non-residential building fit-out separately from the building itself.

1.4 To address this, we propose to clarify the law on when expenditure on non-residential fit-out can be depreciated separately from the building. We propose that this would be allowed if an item is described in the Commissioner’s depreciation determination asset category “Building Fit-out (when in books separately from building cost)” or if the item is an item of plant. We also propose a rule that will allow people who have not separately identified items of fit-out in their non-residential building to continue to depreciate a portion of their building’s tax book value at the old building depreciation rate.

1.5 The second issue discussed is about uncertainty in how the grandparenting of depreciation loading applies to certain situations.

1.6 As part of the Budget 2010 tax package, depreciation loading was removed on a prospective basis from assets purchased after 20 May 2010. The specific rule introduced in Budget night legislation stated that an item would be eligible for depreciation loading if it was acquired, or there was a binding contract for its purchase or construction, on or before 20 May 2010. However, since this legislation was enacted we have become aware of situations, such as when a person builds an asset themselves, where the application of this rule is unclear.

1.7 To provide additional clarity we are proposing to introduce a new grandparenting rule. This new rule would mean that, for an item of depreciable property to be eligible for depreciation loading, its owner would need to have either acquired the item on or before 20 May 2010, or alternatively, had both intended to and actually begun purchasing or constructing the item on or before 20 May 2010.

1.8 Officials are interested in feedback on these proposals, and if the attached draft legislation gives effect to the proposed policies. Submissions on problems related to these issues but are not addressed by our proposals are also welcomed and will be taken into account when we make formal recommendations to the Government on any legislative changes.

How to make a submission

1.9 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for officials from Inland Revenue and the Treasury to contact you about your submission to discuss the points it raises. Submissions should be made by 1 September 2010 and be addressed to:

Post-budget depreciation issues
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140

Or email [email protected] with “Post-budget depreciation issues” in the subject line.

1.10 Submissions may be the source of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. If you think any part of your submission should properly be withheld under the Act, you should indicate this clearly.