Tax ruling fits bill for commercial owners

Photo / Janna Dixon

Owners of commercial properties are expected to welcome Inland Revenue's clarification of how it intends to treat building fit-out, following the Budget decision to scrap depreciation on buildings.

Deloitte's managing tax partner Thomas Pippos said most of them split the cost of items of fit-out from the actual building structure in order to depreciate them at the higher depreciation rates available.

"If the cost of blinds was not split out from the cost of the building, the depreciation rate will be the rate available for the building, likely to be 2 per cent. If the blinds are split out, then they can be depreciated at 17.5 per cent."

The Budget announced the removal of depreciation deductions on all buildings with an estimated useful life of 50 years or more, which would include most commercial buildings.

"The reforms apply from April 2011 for most taxpayers - and therefore from this time no depreciation would be available on items of fit-out that are not split out from the building structure," Pippos said.

In an issues paper released this week, the IRD proposes a distinction between residential and non-residential buildings and, in the case of the latter, between the structure, which is non-depreciable, and fit-out, which is depreciable. It provides a list of about 90 items which count a fit-out, ranging from lifts to toilet-roll dispensers.

Pippos said that if taxpayers had split out and claimed depreciation on their commercial building fit-out in the past, they would be able to continue to do so, but only on those items of fit-out they had separately depreciated previously.

If they have not previously split out and claimed depreciation on any commercial fit-out then it is proposed they can apply a depreciation rate of 2 per cent straight line, but only on 15 per cent of the building's tax book value. For commercial buildings purchased from the 2012 income year on, taxpayers would be able to split out any items of fit-out.

KPMG's head of property, Ross McKinley, said most property investors would welcome the proposals as they represented little change from current practice. The discussion document also clarifies another policy change - the removal of a 20 per cent depreciation loading.

That measure applied from Budget day, May 20, but it was not clear how it applied to projects which spanned that date.

The consultation paper proposes to amend the law to allow depreciation loading where the taxpayer intended to buy or construct the item on or before May 20 this year, and entered into a binding contract in relation to the purchase or construction of the item, or started construction, on or before that date.

Pippos said this proposal removed uncertainty and took the sensible approach to grandfather assets effectively acquired before the Budget announcements