Special Tax Depreceation Rules

2005 change to the special tax depreciation rules allow the CIR greater flexibility in considering special tax depreciation rate applications.

Sections EE 12 and EE 28 of the Income Tax Act 2004 and sections 91AAG(2), 91AAG(3), 91AAG(5B) and 91AAM(2) of the Tax Administration Act 1994

Changes to the special tax depreciation rules:

  • extend the rules to apply to fixed-life intangible property (such as patents);
  • clarify that the Commissioner may have regard to a range of factors in determining the estimated useful life of an asset;
  • allow the Commissioner to prescribe a special tax depreciation rate using a straight-line formula in addition to the diminishing value formula;
  • allow the Commissioner to prescribe a single special tax depreciation rate for items of the same kind that are subject to the same circumstances that underlie a special tax depreciation rate; and
  • allow the Commissioner to prescribe a special or provisional tax depreciation rate outside the six-month time limit if the taxpayer involved agrees to this.

Background

Under the special tax depreciation rules, taxpayers can apply for depreciation rates that are higher (or lower) than those prescribed by Inland Revenue if they consider the prescribed general depreciation rate is substantially different from the rate that should apply. This may arise, for example, if depreciable property is being used in a way that is different from that considered by Inland Revenue when determining a general economic depreciation rate for the property.

The changes allow the Commissioner greater flexibility in considering special tax depreciation rate applications if he is reasonably satisfied that, in the circumstances, a more accurate estimate of economic life, to the estimate of economic life used to prescribe the general tax depreciation rate (estimated useful life), is applicable.

One of the main changes is to extend the availability of special tax depreciation rates to what is currently fixed-life intangible property (that is, depreciable intangible property which must currently be depreciated over its legal life, such as patents). Taxpayers are now able to approach the Commissioner for a special tax depreciation rate for these assets.

Another change allows the Commissioner to consider a broad range of factors when determining what an accurate estimate of economic life should be. This change in particular is designed to make it easier for the Commissioner to consider the impact of events outside a taxpayer's control which may curtail an asset's useful life (and result in the asset not being able to be salvaged or used). Examples include when the regulatory environment changes so an asset can no longer be used lawfully (for example, environmental legislation which outlaws the use of a particular type of machine) or when the raw materials that are used as an input into the asset are expected to run out. Another example is when the rate of technological obsolescence for an asset is significantly higher than was originally envisaged.

It is worth noting that the Commissioner's general view (TIB Vol 10, No 1 January 1998) is that the "whole of life" approach for determining the estimated useful lives of assets is the appropriate benchmark for setting tax depreciation rates. This view was supported by the Finance and Expenditure Committee and will continue to be the case under the changes to the special tax depreciation rates.

Other changes ensure that the Commissioner can prescribe a special tax depreciation rate using the straight-line method from the outset if a taxpayer requests this. Under the previous rules, the Commissioner was required to issue a special tax depreciation rate using the diminishing value formula (with a straight-line equivalent then having to be calculated).

On the recommendation of the Finance and Expenditure Committee, the legislation has been amended to allow the Commissioner to prescribe a single special tax depreciation rate for a group of identical assets that are all subject to the same special circumstances. For example, a set of five printing presses that because of special circumstances are all expected to last less than their prescribed economic life. Previously, taxpayers had to lodge a separate application for each press, even though the rate allowed would be the same for each item. Now the taxpayer needs to only lodge a single application for the group of assets.

Finally, changes have been made to allow the Commissioner to prescribe a special or provisional tax depreciation rate outside the six-month time limit for issuing such rates, if the taxpayer agrees to this. This change recognises that certain special and provisional tax depreciation rate applications are complex and may require a period longer than six months to be resolved (for example, if they require the input of expert valuers). One of the concerns raised in submissions to the Finance and Expenditure Committee with this change was the status of tax assessments where a special or provisional rate has been applied for and the taxpayer agrees to an extension of time, but such an extension results in a tax assessment being made before the issue of a rate. In these circumstances, taxpayers should use the relevant Commissioner-prescribed rate for the purposes of the assessment. Then, if the application for a special or provisional deprecation rate is granted, and it covers the income year at issue, taxpayers can make a request to the Commissioner under section 113 of the Tax Administration Act 1994 for an amendment to that assessment.

Key features

Section EE 28 of the Income Tax Act 2004 has been amended to extend the special tax depreciation rules to apply to fixed-life intangible property such as patents. Section EE 12(1) has been amended as a result.

Section 91AAG(2) of the Tax Administration Act 1994 has been amended to clarify that the Commissioner may have regard to a range of factors in determining the estimated useful life of an asset.

Section 91AAG(3) has been amended to allow the Commissioner to prescribe a special tax depreciation rate using a straight-line formula in addition to the diminishing value formula.

On the recommendation of the Finance and Expenditure Committee, section 91AAG(5B) has been added to allow the Commissioner to prescribe a single special tax depreciation rate for items of the same kind that are subject to the same circumstances that underlie a special tax depreciation rate.

Section 91AAM(2) has been amended to allow the Commissioner to prescribe a special or provisional tax depreciation rate outside the six-month time limit if the taxpayer agrees to this.

Application date

The amendments will apply to applications for special tax depreciation rates that are made in the 2005-06 and subsequent income years. The amendment to the six-month time limit also applies to provisional tax depreciation rate applications made in the 2005-06 and subsequent income years.

COSTS ASSOCIATED WITH FAILED OR WITHDRAWN RESOURCE CONSENTS

On the recommendation of the Finance and Expenditure Committee, section DB 13B of the Income Tax Act 2004 has been amended to treat the costs incurred on a failed or withdrawn resource consent application as deductible if those costs would have formed part of the cost of depreciable property, or would otherwise have been allowed as a deduction, if a resource consent had been granted. Section DJ 14B in the Income Tax Act 1994 has also been amended accordingly.