Depreciation Schedules

What is an Asset Categorisation Schedule or Depreciation Schedule?

An asset categorisation schedule is used in the calculation of depreciation claims for tax purposes.

An asset categorisation apportions the purchase price of the property into its various components being land, improvements and chattels, so that appropriate depreciation rates can be applied to each.

Asset categorisation schedules can be prepared for residential, commercial and industrial properties.

Guidelines on depreciation rates are set out in the following Inland Revenue Department publications:

• Depreciation – A Guide for Businesses IR 260 (December 2006)

• Rental Income IR 264 (June 2007)

• General Depreciation Rates IT 265 (March 2007)

Chattels Apportionment

The estimation of the value of the building chattels is the market value of each particular item after taking into account considerations such as the added rental value, age, replacement cost, physical depreciation, functionality and obsolescence.

Current Issues

The IRD has published their view that residential rental property chattels do not include:

“Internal walls, doors, electrical wiring and plumbing, etc, as well as furniture and fittings which are permanently attached to the building, such as kitchen cupboards, bathroom vanities and built-in wardrobes”.

Such components are deemed by IRD to be part of the building and should therefore be depreciated at the default rates for buildings, not at the higher rates provided specifically for those building components.

Now that it has taken this view IRD has not made taxpayers amend historic depreciation claims, but will insist that future claims for fitout items that could be excluded from its definition of chattels must be grouped in the default buildings category.

For commercial property, we note the IRD’s Policy Advice Division has looked into the classification of building components in 2004 and their report stated that:

“In better defining the law in this area, we are confining our attention to residential accommodation. The reason for treating residential property differently from commercial property is that changes to the structure or the layout are thought to occur less frequently than they do for commercial buildings. In addition, commercial buildings are used for a diverse range of activities. Often these activities may require additional or specialised structural components (Chapter 9, Repairs and maintenance to the tax depreciation Rules, An Official Issues Paper’, July 2004, Policy Advice Division of the Inland Revenue Department & The New Zealand Treasury)".

IR 265 contains the following statement on this issue:

“Inland Revenue is considering its legal position on what is a building for tax depreciation purposes, and the correct treatment of items in the building fit-out category listed in this guide. When this work is finalised, certain depreciation rates set out in this guide may no longer be correct”.

Improvements Value Apportionment

After the chattels value has been deducted from the purchase price, the remainder is allocated between land, which is not depreciable, and the improvements value, which is subject to depreciation at various rates.

Taxpayers can choose to rely upon a Registered Valuer’s assessment of the land value and improvements value making up the purchase price. Alternatively, they can, after deducting an estimate of the chattels value from the purchase price, use the ratio of land value to capital value from the current rating valuation to apportion the land and improvements values.

Taxpayers can choose to account for depreciation on a diminishing value basis or on a straight line depreciation rate. The former allows a greater depreciation deduction in earlier years and a lesser deduction in later years.

A 20% depreciation loading is also applicable to new assets purchased after the 1995/1996 income year that have never been used, or held for use in New Zealand. This loading is not available for second hand assets or buildings.

If you would like to discuss the current depreciation regime for your property or would like to instruct us to prepare a depreciation schedule please click here.

All reasonable measures have been taken to ensure the quality and accuracy of the above information, however Seagar & Partners makes no warranty, nor assumes any responsibility for the accuracy, correctness or use of any of the information or the interpretation thereof.