Remedial matters relating to the depreciation of buildings Depreciation Determination Number 79

Note to determination DEP 79

The Taxation (Budget Measures) Act 2010, enacted on 27 May 2010, introduced significant changes to the depreciation regime applying to buildings. With effect from the start of the 2012 income year the depreciation rate of buildings with an estimated useful life of 50 years or more was changed to 0%. The changes were intended to make New Zealand's tax rules more neutral by recognising that allowing depreciation on buildings with long lives, and the application of depreciation loading on certain assets, provides tax depreciation rates in excess of true economic depreciation rates.

As a result of this legislation, it is necessary to amend the depreciation rate applicable to all of the generic building assets that have an estimated useful life of 50 years, to 0%. These are Buildings (default class), Buildings with reinforced concrete framing, Buildings with steel or steel and timber framing and Buildings with timber framing.

On 30 April 2010 the Commissioner issued Interpretation Statement IS 10/02: Meaning of "building" in the depreciation provisions ("IS 10/02"). IS 10/02 concluded that essentially a building is a structure that has walls and a roof, is of considerable size, is meant to last a considerable period of time and is generally fixed to the land on which it stands; a building is a structure that can function independently of any other but is not necessarily a physically separate structure.

The effect of IS 10/02 is that some assets that were not previously regarded as buildings will now come within the meaning of "buildings" and the depreciation rate applicable to them is to be amended to 0%.

Carparking buildings and carparking pads

Carparking buildings were previously regarded as "structures" for depreciation purposes. Inland Revenue acknowledges that many buildings provide carparking facilities for owners/occupiers. For the purposes of this determination, carparking buildings are buildings that are built and used predominately for carparking where the carparking facilities are the main function of the building.

The same treatment cannot be given to carparking pads, which are more in the nature of hardstanding. The depreciation rate available on this type of asset therefore remains unchanged.

In view of this change in treatment the current reference to Carparks (buildings and pads) has been removed from the Building and structures asset category and replaced with two new asset classes, Carparking buildings and Carparking pads.

Buildings (portable) and site huts

A further conclusion of IS 10/02 was that some items within existing asset classes could be either buildings or structures. This is on the basis that, while some of the items may have the appearance of a building, be of a considerable size and are attached to the land, others items may either not look like a building (they will look more like a container or some other structure) and/or may be too small and/or portable to be considered a building. Generally, a structure is considered to be too small to be a building when it is able to be moved without mechanical assistance (such as a crane or hiab) and it is not attached to the land. Due to their varying appearance, size and portability, buildings (portable) and site huts could potentially fall within this category.

The treatment of those portable buildings that have the appearance of a building, are of sufficient size and are sufficiently attached to the land so that they fall within the definition of a "building" remains unchanged. Structures that are too small, are sufficiently easy to relocate and/or do not have the appearance of a building will be treated as portable huts (not buildings).

By their very nature, site huts will be either portable huts (not buildings) or buildings (portable), depending on their appearance, size and portability. Because of this, the current reference to Site huts in the Contractors, builders and quarrying industry category has been removed and replaced with Buildings (portable) and Portable huts (not buildings).

Note that despite both Buildings (portable) and Portable huts (not buildings) having an estimated useful life of 12.5 years, different rates of depreciation apply. The reason for this is the varying formulae used to calculate economic rates contained in subpart EE of the Act.

Grandparenting provisions

On 30 July 2009 the Minister of Revenue announced "grandparenting" provisions for certain items of depreciable property acquired on or before 30 July 2009. This treatment was confirmed by the Taxation (Budget Measures) Act 2010. As carparking buildings and site huts are covered by this grandparenting provision they have been added to this Determination. Despite these assets now coming within the meaning of "buildings" those assets that were acquired or a binding contract was entered into for their purchase or construction, on or before 30 July 2009, will continue to be treated as structures for depreciation purposes.

Grandstands

A further example of assets that may or may not be a building, are grandstands. For example, stand-alone tiered seating is a structure, while grandstands that incorporate other facilities, such as changing areas, toilets or storage areas, are likely to be buildings (that have seating attached to them). To take account of this difference, it is proposed to include a new asset category Tiered seating (not part of a building) for those grandstands that are structures and to amend the depreciation rate of Grandstands to 0%.

General Depreciation Determination DEP 79

This determination may be cited as "Determination DEP79: Tax Depreciation Rates General Determination Number 79".

1. Application

This determination applies to taxpayers who own items of depreciable property of the kinds listed in the table below.

This determination applies for the 2012 and subsequent income years.

2. Determination

Pursuant to section 91AAF of the Tax Administration Act 1994 I set in this determination the economic rates to apply to the kinds of items of depreciable property listed in the table below by:

• Deleting from the "Building and structures" asset category the general asset classes, estimated useful lives and diminishing value and straight-line depreciation rates listed below:
  
  

  Building and structures	Estimated useful life (years)	DV rate (%)	SL rate (%)
  Buildings (default class)	50	3	2
  Buildings with reinforced concrete framing	50	3	2
  Buildings with steel or steel and timber framing	50	3	2
  Buildings with timber framing	50	3	2
  Carparks (buildings and pads)	50	4	3
  Grandstands	50	3	2

• Deleting from the "Contractors, builders and quarrying" industry category the general asset class, estimated useful life and diminishing value and straight-line depreciation rate listed below:
  
  

  Contractors, builders and quarrying	Estimated useful life (years)	DV rate (%)	SL rate (%)
  Site huts	12.5	16	10.5

• Adding into the category "Building and structures" asset category the general asset classes, estimated useful lives, and diminishing value and straight-line depreciation rates listed below:
  
  

  Building and structures	Estimated useful life (years)	DV rate (%)	SL rate (%)
  Buildings (default class)	50	0	0
  Buildings with reinforced concrete framing	50	0	0
  Buildings with steel or steel and timber framing	50	0	0
  Buildings with timber framing	50	0	0
  Carparking buildings	50	0	0
  Carparking pads	50	4	3
  Carparking buildings acquired, or a binding contract entered into for the purchase or construction of the building on or before 30 July 2009	50	4	3
  Grandstands	50	0	0
  Tiered seating (not part of a building)	50	4	3
  Portable huts (not buildings)	12.5	16	10.5

• Adding into the category "Contractors, builders and quarrying" industry category the general asset classes, estimated useful lives, and diminishing value and straight-line depreciation rates listed below:
  
  

  Contractors, builders and quarrying	Estimated useful life (years)	DV rate (%)	SL rate (%)
  Buildings (portable)	12.5	13.5	8
  Portable huts (not buildings)	12.5	16	10.5
  Site huts acquired, or a binding contract entered into for the purchase or construction of the building on or before 30 July 2009	12.5	16	10.5

3. Interpretation

In this determination, unless the context otherwise requires, words and terms have the same meaning as in the Income Tax Act 2007 and the Tax Administration Act 1994.

This determination is signed on the 21 October 2011

Rob Wells
Manager
LTS Technical Standards