Building fit-out depreciation allowances to be maintained

Commercial and industrial property investors should still be able to claim significant depreciation allowances following Inland Revenue and Treasury’s joint support for a continuation of fit-out asset depreciation allowances, according to one of New Zealand’s leading asset depreciation experts.

John Freeman, a depreciation adviser and Wellington-based director for valuations and advisory services for Bayleys Valuations Ltd, says a policy review by the Inland Revenue Department and the Treasury entitled “Post-budget depreciation issues” broadly recommends a continuation of the current structure.

Mr Freeman says this would mean assets such as lifts, air-conditioning systems, plumbing, and electrical reticulation, would be treated differently to those in residential buildings - with depreciation claims continuing to be allowed.

He says an analysis of eight recent commercial and industrial property depreciation valuations undertaken by Bayleys Valuations showed that between 32% and 87% of the total depreciation allowances currently claimed from a combination of building and fit-out allowances were for the fit-out.

The IRD and Treasury document is inviting submissions on the review but Mr Freeman expects the property industry and companies who own buildings to generally support the findings, subject to some further enhancements.

“We see little likelihood of any significant opposition to what is being proposed, particularly as the Government’s main target with their property tax changes would appear to be what it sees as an over investment in residential property,” he said.

An earlier IRD review on residential building fit-out had signaled the withdrawal of depreciation allowances for many fit-out asset categories.

“Since the Budget announcement of a review of commercial property fit-out depreciation, the Property Council of New Zealand, with staunch support from KPMG, has liaised with IRD to show that assets currently considered as commercial building fit-out for tax depreciation purposes do depreciate, both financially as well as physically, over time,” says Freeman.

“Generally they are replaced far more often than their residential counterparts.”

Inspections of a cross section of properties were undertaken jointly with the IRD to demonstrate the requirement for commercial building refurbishment and the replacement of building fit-out. Bayleys Valuations Limited was asked to provide sample depreciation reports to reassure the IRD that such assessments for tax purposes were founded upon sound and logical valuation approaches.

“All of the hard work undertaken on behalf of property investors seems to have paid off and this is a major triumph for New Zealand’s commercial property industry. Property depreciation allowances obviously won’t be as significant given the removal of building depreciation. However, it still means that a substantial portion of the depreciation that has been able to be claimed from a combination of building and fit-out allowances is likely to continue to be allowed.”

Freeman says the analysis of the eight recent depreciation valuations on buildings of varying types and age showed that fit-out depreciation allowances on six of the properties exceeded those of the building itself, in some cases “by a very substantial amount.”

The most extreme example was a hotel with a total cost of $8,779,325 which had $797,000 of fit-out depreciation allowances - compared with $117,877 of building allowance. In another example an $11.7million coolstore and warehouse had fit-out allowances of $538,701, with the building’s allowance only $186,188. Even the fit-out allowance of $84,905 on a standard $3.327 million industrial warehouse outstripped the $75,595 on the building.

However, Freeman says if no commercially acceptable segregation of commercial building fit-out from the building is undertaken such assets would be treated the same as the building for tax depreciation purposes, meaning a zero rating in terms of claims.

“As we head into a period when building tax depreciation allowances are set at zero, it therefore encourages all property investors who want to maximise the after-tax income return from their property investment to get the allocation of cost between commercial buildings and their fit-outs sorted out now.”