Changes to depreciation loading
2010 legislation removes depreciation loading from items purchased after 20 May 2010.
Sections EE 31, EE 37 and EE 61 of the Income Tax Act 2007
Depreciation loading increases the tax depreciation rate by 20% for qualifying items. It was introduced as an incentive to encourage New Zealand businesses to invest in new capital equipment. However, this concession is inconsistent with a broad-based, low-rate tax system, and so it has been removed from items purchased after 20 May 2010.
- Depreciation loading has been removed from assets purchased after 20 May 2010.
- Depreciation loading continues to apply to qualifying assets purchased on or before 20 May 2010.
- Any improvements to assets that continue to receive loading made after 20 May 2010 must be treated as a separate asset and do not qualify for loading.
No depreciation loading for items purchased after 20 May 2010
Section EE 31 has been amended with new subsection (3). This subsection applies when a binding contract for an asset's acquisition or construction is entered into after 20 May 2010. It provides that an asset's annual depreciation rate is just its applicable economic, special or provisional rate, unless the item is a long-lived building or international aircraft.
This contrasts with existing subsection (2), which applies to assets for which a binding contract for acquisition existed on or before 20 May 2010. Under this section, many assets have an annual rate of their applicable economic, special or provisional depreciation rates multiplied by 1.2. This acceleration of depreciation rates is often referred to as depreciation "loading".
Treatment of improvements
Amendments to section EE 37 apply if a person owns an asset that will continue to receive loading after 20 May 2010. It provides that if they make improvements to the asset, or enter into a binding contract to make improvements to an asset, they must treat the improvements as separate items. Therefore, the annual depreciation rate for these improvements is set by new subsection EE 31(3) (Rate for item acquired after 20 May 2010).
The effect of this is that any improvements made to assets purchased before 20 May 2010 will be ineligible for depreciation loading. These improvements will depreciate for tax purposes at the appropriate rate as set by the Commissioner of Inland Revenue.
On 1 April 2010, A Co Ltd purchased $10,000 worth of laptop computers. Laptop computers have a 40% straight-line depreciation rate, but as they are eligible for loading, A Co Ltd is able to claim depreciation deductions of 48% of their value, or $4,800 each year.
On 1 April 2011, A Co Ltd purchased another order of $10,000 worth of laptop computers. However, as they have been purchased after 20 May 2010, A Co Ltd is only able to claim depreciation deductions of 40% of their value, or $4,000 each year.
This means, for the 2011-12 income year, A Co Ltd can deduct $4,800 for depreciation of the earlier laptops and $4,000 for the later laptops.
The new rules for depreciation loading came into force on 20 May 2010. They apply to all new items of depreciable property for which a binding contract for acquisition or construction was entered into after 20 May 2010.