Auckland Accountants Advise Maximising Depreciation with Chattels Valuations

Posted on Saturday, October 12 2013

Auckland Accountants, Thorne Accounting Offers Recommendations On Chattels Valuations

• We are Auckland Accountants that recommend a chattels valuation for every residential rental property
• In November 2011, the IRD released an updated list of residential rental property chattels that can be depreciated
• Depreciation cannot be claimed on chattels unless a chattels valuation is completed
• The benefit of a professional chattels valuation will always outweigh its cost
• You can do your own chattels valuation if you can justify the value applied to those chattels to the IRD in the event of an audit

Chattels Depreciation Rules

In November 2011, the IRD released their updated list of residential rental property chattels for that depreciation category. I think that this final piece of clarity will put any lingering depreciation questions to bed for as long as National remains in government.

As you should be aware by now, depreciation can no longer be claimed on buildings from 1 April 2011. However, depreciation can still be claimed on chattels and some building fit-out which is why chattels valuations are very important.

The IRD released an interpretation statement in December 2009 that outlined what the IRD considered to be a chattel and what they considered to form part of the building. While the IRD’s interpretation statement is simply their take on the tax law, I think you’d be asking for a costly legal battle with the IRD if you decided to take a different stance.

The IRD’s interpretation is that only an item that is distinct from the building can be classified as a chattel and depreciated. To determine whether or not an item is part of or separate from the building, the IRD have come up with a 3 step test to be applied.

Here is a simplified version of those tests that should be applied:

(1) If the item is not attached to the building, then it can be depreciated separately.

(2) If the item is integral or firmly attached to the building, then it is part of the building so cannot be depreciated.

To further clarify the items that the IRD consider to be chattels, they released an updated list of residential rental property chattels in November 2011. This list applies from 1 April 2011 and will provide a lot of clarity in future.

It is important to note that items that do not meet the IRD definition of buildings can also be depreciated. Two examples of this are driveways and fences.

IRD’s New Chattels List

Items that the IRD consider to be chattels and therefore still depreciable are:

Air conditioners (through wall type)
Air ventilation systems (in roof cavity)
Alarms (wired or wireless)
Appliances (small)
Awnings
Bedding
Blinds
Carpets
Clotheslines
Crockery
Curtains
Cutlery
Dehumidifiers (portable)
Dishwashers
Drapes
Dryers (clothes)
Freezers
Furniture (loose)
Glassware
Heaters (electric)
Heaters (gas, portable & not flued)
Heap pumps (through wall type)
Lawn mowers
Light shades (excl the light fitting)
Linen
Mailboxes
Microwave Ovens
Refrigerators
Satellite receiving dishes
Stereos
Stoves
Televisions
Utensils (incl pots and pans)
Vacuum cleaners
Washing machines
Waste disposal units
Water heaters (over sink type)
Water heater (hot water cylinders)
Water heaters (solar)

Now that we have final clarity on the laws and interpretations surrounding chattels, it gives you enough information to decide whether to get a chattels valuation.

About Chattels Valuations

If you purchase a rental property and don’t identify the value of the chattels prior to submitting your tax return, the entire purchase price will be treated as land & buildings for tax purposes. So, if you don’t identify the value of the chattels, you won’t get any depreciation claim on your property as the depreciation rate for buildings is 0% from 1 April 2011.

It is important to note that a combined value of chattels listed on a registered valuation or on a sale & purchase agreement is not an acceptable chattels valuation. For tax purposes, a chattels valuation must be a list of items with individual values.

If you purchase a property and you identify the value of the chattels through a chattels valuation, you can then claim depreciation on the value of those chattels. Some common chattels and their depreciation rates are listed below as examples:

Straight Line Basis Diminishing Value Basis

Carpet 17.5% 25%
Curtains & Blinds 17.5% 25%
Dishwasher 21% 30%
Stove 17.5% 25%

Is a Chattels Valuation Worth the Cost?

This is a question I get a lot. And my answer is always yes. A chattels valuation typically costs about $400 plus gst, will always generate more in tax savings and is a tax deductible expense in itself. However, just how much the benefit of a chattels valuation provides does vary from property to property.
Here are some examples taken from actual chattels valuations:
Example One:
A client purchased a 3-bedroom property in Birch Place in Otara for $195,000. The property was in average condition having undergone no major refurbishment since construction. The figures below are taken directly from the chattels valuation that was prepared from a site visit on 20 December 2010.
The valuation report identified chattels to the value of $6,780. If I conservatively assume that the value of those same chattels will be about half of that initial value when the property is sold, then that means the client will receive a permanent cash benefit of $1,118.70 ($6,780 / 2 x 33% based on top personal tax rate)

The cost of the valuation report was $454.25 (incl gst). As the cost of the report is tax deductible, the client effectively got a 33% cost reduction based on the top personal tax rate.

Cash Benefit from Valuation $1,118.70
Cash Cost of Valuation ($304.35)

Net Cash Benefit $814.35

If the client didn’t get a chattels valuation, then their depreciation claim from 1 April 2011 would have been nil.

Example Two:
A client purchased a property in Hillside Drive in Upper Hutt for $385,000. The property was in excellent condition as the property was brand new. The figures below are taken directly from the chattels valuation that was prepared from a site visit on 6 May 2011.
The valuation report identified chattels to the value of $46,965. If I conservatively assume that the value of those same chattels will be about half of that initial value when the property is sold, then that means the client will receive a permanent cash benefit of $7,749.23 ($46,965 / 2 x 33% based on top personal tax rate)

The cost of the valuation report was $431.25 (incl gst). As the cost of the report is tax deductible, the client effectively got a 33% cost reduction based on the top personal tax rate.

Cash Benefit from Valuation $7,749.23
Cash Cost of Valuation ($288.94)

Net Cash Benefit $7,460.29

If the client didn’t get a chattels valuation, then their depreciation claim from 1 April 2011 would have been nil.

Example Three:
A client purchased a 4-bedroom property in Robert Street in Ellerslie for $450,000. The property was in good condition having undergone no major refurbishment since construction. The figures below are taken directly from the chattels valuation that was prepared from a site visit on 4 December 2008.
The valuation report identified chattels to the value of $13,845. If I conservatively assume that the value of those same chattels will be about half of that initial value when the property is sold, then that means the client will receive a permanent cash benefit of $2,284.43 ($13,845 / 2 x 33% based on top personal tax rate)

The cost of the valuation report was $393.50 (incl gst). As the cost of the report is tax deductible, the client effectively got a 33% cost reduction based on the top personal tax rate.

Cash Benefit from Valuation $2,284.43
Cash Cost of Valuation ($263.81)

Net Cash Benefit $2,020.62

If the client didn’t get a chattels valuation, then their depreciation claim from 1 April 2011 would have been nil.

Should All Auckland Accountants Be Offering Better Advice On The New Chattels Rules ?

While we are Auckland accountants, we have clients around NZ and overseas and have many other examples of chattels valuations on properties throughout NZ.

Chattels Valuation Summary

While a chattels valuation will always provide you with a net cash benefit, the higher the value of the property and the newer that property, the more that benefit is likely to be. As Auckland accountants, we see great benefit in chattels valuations in Auckland properties although properties throughout NZ will benefit from a chattels valuation.

Advantages of a Chattels Valuation
• Allows depreciation to be claimed on chattels that would otherwise not be permitted
• Increased depreciation claim to give you better cashflow
• Upon sale, the written down value of chattels should be an acceptable value meaning there would be no depreciation recovered
Disadvantages of a Chattels Valuation
• The cost of getting a chattels valuation done
Estimating Chattels Values Yourself

Although we think a good way of valuing chattels is to get a professional chattels valuation, you can save yourself the cost of the chattels valuation by estimating the value of the chattels yourself.

The following is taken directly from page 24 of the Inland Revenue’s September 2009 rental guide (IR264).

“If you have a registered valuation, use the total value of all the chattels and apportion this amongst them on a market value basis.

It is important to note that the value of chattels within a registered valuation will not include all depreciable chattels so you will not be maximising your depreciation claim by using that figure.

If you don’t have a registered valuation, use the market value of each chattel as its opening tax value on which to claim depreciation. You can find out these market values from secondhand dealers or from classified advertisements for similar items of the same age and condition.”

If you decide to estimate the value of the chattels yourself, there is a form on our website that will help you do this. Remember that would have to justify the values you put on the chattels in the event of an IRD audit.

Remember that the net cost of a typical chattels valuation is only $308.20 ($400 plus gst less 33% tax benefit). For that low cost, I think it’s well worth knowing that you have an independent valuation to show the IRD in the event of any audit.

Timing of Chattels Valuations

As depreciation is based on what is paid for a property on the date of settlement, any major renovations to the property between then and when the chattels valuation is performed can cause problems. For this reason, we recommend any chattels valuation to be performed as soon after settlement as possible.

As a general rule, a chattels valuer will usually complete a chattels valuation up to six months after a property has been purchased as long as there haven’t been any major renovations to the property since it was purchased.

Depreciation Recovered

It should also be noted that any depreciation that is claimed on chattels as an expense may also be treated as income in the year the chattel is sold if the sale proceeds allocated to that chattel exceed the depreciated value of the chattel. Therefore, by increasing your depreciation claim through a chattels valuation, you may also be increasing the amount of the depreciation to be recovered on the sale of the property.

Of course, it is likely that if a building increases in value, the chattels will still decrease in value. We believe that the written down value of the chattels would be an acceptable value to use as the sale proceeds allocated to the chattels. This would eliminate any depreciation recovered on the chattels entirely.

Auckland Accountants Thorne Accounting On IRD Chattels Rules

Tony Thorne
www.ThorneAccounting.co.nz
Auckland Accountants Thorne Accounting On IRD Chattels Rules

 

 

 

 

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Expert's Bio

Tony Thorne

Thorne Accounting has been providing specialised accounting and tax services to residential and commercial property investors since 2004. Our mission is to provide the highest quality tax and accounting services to property investors. We are constantly fine tuning the way we work with property investors so we can provide this superior service at competitive prices.

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