The IRD: Building fit-out interpretation

From the 2011/12 income year, depreciation on buildings reduced to zero percent.

Acknowledging that some taxpayers may have previously taken the conservative approach of classifying fit-out as “building”, the new legislation does provide the option of allowing some depreciation at two percent (straight line).

In contrast, taxpayers have been exploring the option of reclassifying fit-out from “building” by:

  • Employing a quantity surveyor to split a building’s current book value between fit-out and building proper, and then depreciating the fit-out going forward at fit-out rates.
  • Using original records to calculate what the book value of fit-out would be if it had been correctly depreciated and using that value to depreciate the fit-out going forward.
  • Recalculating depreciation not claimed due to it being classified as “building” and making an application to the IRD to claim that depreciation by retrospectively amending past income tax returns (or putting a deduction through their current income tax return) and depreciate the applicable items as ‘fit-out’ going forward.

The IRD has now released draft ‘questions we’ve been asked’ QWBA ED 0140: Depreciation of commercial fit-out, which sets out the IRD’s view that the only option to depreciate such fit-out is to use the two percent pool option.  The view appears unfair as taxpayers that have previously been conservative are now worse off.

Irrespective of the building versus fit-out scenario, the wider implications of the IRD’s view in situations where a taxpayer has used the wrong depreciation rate is unclear.  Can that rate be corrected?  Potential for further cost exists as depreciation recovery income is calculated on the premise that the correct rate was used.  Strong submissions against the IRD’s view are expected.

Published Autumn 2012.

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