Depreciation Changes for Commercial Properties

Posted on Friday, December 9 2011


(1) For commercial buildings, assets listed under the “Building Fit-out” depreciation category may still be separately depreciated
(2) Separating the fit-out cannot be done retrospectively
(3) A fit-out pool of 15% of the buildings tax value can be created on 1 April 2011 if depreciation was only claimed on the building prior to that

Can depreciation still be claimed on the fit-out for a commercial building?

Historically, many commercial and residential property investors paid for valuations to be performed when an investment property was purchased so that any chattels and fit-out could be separated from the purchase price. This would allow a much greater depreciation claim as fit-out and chattels are depreciated at a higher rate than buildings (the building rate is 0% from 1 April 2011).

In May 2010, the IRD released a policy regarding the chattels that they would allow to be separated from a residential building. The IRD considered that many items in a residential rental property formed part of the building including internal walls, wiring, plumbing and items attached to the building. All those items can no longer be separated from a residential building so they must be depreciated at the building depreciation rate.

While the IRD policy specifically related to residential rental properties, the policy created uncertainty as its principles could be interpreted as applying to commercial rental properties as well. In August 2010, the IRD released a proposed policy to clarify the situation. Submissions on that policy closed on 1 September 2010 and we are now waiting for the final policy to be released which I expect to happen sometime before the end of March 2012.

For an item to be separately depreciated in a commercial property, the IRD proposes to allow an item if it is described in the depreciation asset category of “Building Fit-out”.

So, I still consider it to be a great idea to get a fit-out valuation done when purchasing a commercial property as you can significantly increase the depreciation claim on that property by doing so. Here are a few companies that do commercial fit-out valuations for tax purposes:

Can the fit-out be separated retrospectively?

When a commercial rental property is purchased, you have following three options:

(1) Not to claim depreciation at all; or
(2) Identify the building value and depreciate it at the building rate of 2% to 31 March 2011 and 0% after that; or
(3) Identify items of fit-out and depreciate those items separately from the cost of the building.

All of the options are allowed but once you’ve made your decision, the IRD will not allow you cannot change it. So, if you didn’t get a valuation to identity the items of fit-out in the past, then you can’t do it now.

However, for those that went with option 2, there is some relief. It is proposed to allow you to create a building fit-out pool based on 15% of the buildings book value at 31 March 2011. That fit-out pool would be depreciated at 2% straight line from 1 April 2011. It is also proposed that there would be no loss on sale or depreciation recovered on the fit-out pool when the building is sold. So, if you are in the position where you have only claimed depreciation on your commercial buildings up until now, the pool method for depreciation your fit-out from 1 April 2011 would be a great option for you.

Tony Thorne




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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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