Changes to the tax depreciation rules are now in affect. The changes are, for the most part, taxpayer-friendly and will result in significant increases to tax depreciation claims.
Double Declining Balance (DDB)
The new DDB methodology has replaced the old Diminishing Value (DV) method in relation to plant and equipment.
The DDB is calculated as 2/estimated useful life. The “estimated useful life” of a particular assets hasn’t changed and can be found on the Inland Revenue website www.ird.govt.nz under “Depreciation booklet” (IR265). For example, for a computer having an estimated useful life of four years, the DDB rate is:
2/4 = 50% (plus the 20% loading for new assets only)
So for a new computer the rate is now 60% as compared to 48% previously.
The DDB rate is applied to the tax book value of the asset each year until the asset is fully depreciated. The new rates effectively accelerate depreciation deduction. Remember depreciation commences from the month of purchase on a proportionate basis.
The DDB method cannot be applied to motor vehicles and certain types of aircraft (for both of which new higher rates have come into effect), nor to buildings or fixed life intangible property.
Buildings and Structures
The depreciation rates have been reduced for buildings and structures acquired after 19 May 2005 (when changes were announced) to 2% straight line or the diminishing value (DV) equivalent of 3%. No rates distinction has been made between residential, commercial and industrial property or technological developments and consumer preferences not necessarily to do with the age of the building.
New Low Value Asset Thresholds
Individual asset purchases that have a GST exclusive cost of less than $500 and purchased after 19 May 2005 can be immediately expensed. This is up from $200 previously.
The Comparatives
This table compares the first year depreciation claims applying the old and new deprecation rules for new assets.
|
Asset Type
|
Cost
|
Old rules (DV)
|
New rules (DDB)
|
Difference
1st year
|
|
Computer
|
$5,000
|
2,400
|
3,000
|
$600
|
|
Mobile Phone
|
$600
|
360
|
482
|
$122
|
|
New Chairs
|
$8,000
|
1,440
|
1,536
|
$96
|
|
Fitted Office Furniture
|
$20,000
|
2,280
|
2,400
|
$120
|
|
Car
|
$40,000
|
12,480
|
14,400
|
$1,920
|
|
General Manufacturing Plant
|
$200,000
|
28,800
|
31,200
|
$2,400
|
|
Building *
|
$1 million
|
40,000
|
30,000
|
$(10,000)
|
* DV method applied for both the old and new rules amount.
What is evident from the figures is that there will be significant increases to the deprecation claims of short lived assets in the early income years and this is undoubtedly positive for taxpayers. Also, building depreciation falls, however this will not usually be of concern as in the long term building depreciation is usually recovered in full when sold.
Application Dates
For buildings, the new rules generally apply to those acquired on or after 19 May 2005.
The old depreciation rates must be used for all plant and equipment acquired before 01 April 2005 (i.e. the DDB method cannot be used). These rates must continue to be used until the asset is disposed of.
For plant and equipment acquired in your 2005/06 income year, you can choose to apply the old or new rates. However, having made the choice, you must continue to apply that rate until the asset is disposed of.
From the 2006/07 income year on, plant and equipment must be depreciated using the new rates.
Conclusion
