Under Covid-19, New Zealand government has issued some new policies to support businesses. Here we will talk about one of the policies, which is claiming depreciation on commercial properties.
In fact, as early as 2011, New Zealand’s buildings were all depreciable, but after the reform of tax legislation in 2011, they were no longer be depreciated. At this time due to the impact of the Covid-19, the government introduced new a policy to make the commercial properties being depreciated in the financial year of 2021.
What is depreciation? In a word, assets lose value over time as they get older, and this loss of value is called depreciation. Businesses claim depreciation loss as a deduction expense each tax year. Different assets have different depreciation rates using different methods.
The depreciation rate for the buildings part of commercial properties is 2% using the diminishing value (DV) method and 1.5% using the straight line (SL) method.
Here is an example:
Wang bought a store in 2018. It was not depreciable before. However, in the financial year of 2021 (01/04/2020-31/03/2021), the building can be depreciated. Assuming the total value of the property is $500,000, the value of land is $100,000 and the value of building is $400,000. Then, the depreciation value of the store in FY2021 using the DV method is: $400,000*2%*(12/12)=$8000. Wang can deduct the depreciation of $8000 with other deductiable expenses when he claim income tax for the rental income of this store. Thus, it will save a lot of taxes for Wang in FY2021.
This new policy is only for commercial properties, such as stores, warehouses and short-stay accommodation, and it does not apply to residential properties.
What impact does this policy have? Obviously, it reduces the pressure on cash flow of commercial property owners due to the decreasing rents affected by Covid-19. But this is only for short term. This part of underpaid tax will most likely need to be returned to IRD in lump sum when the property is sold in the future. This is about Depreciation Recovery. The depreciation is calculated based on the budget value rather than market value, so it does not reflect the actual value of depreciation. You will know the market price when you sell the property, and then you will get the actual value of depreciation.
Even though it does not reduce the taxes actually, it releases the financial pressure of businesses at this difficult time.
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