INBOX : Fit-out depreciation to stay

Companies that own properties they occupy can take some comfort from recent joint recommendation from Inland Revenue and Treasury to leave depreciation allowances on building fit-out largely untouched.
A number of public companies have already flagged that the removal of depreciation allowances on buildings structures, announced in the Budget, will have significant effect on after-tax profits. further diminution of depreciation allowances would have had more impact on the bottom line.
But some hard work by the Property Council of New Zealand, with the support of KPMG, to demonstrate to IRD that commercial and industrial building fit-out assets do depreciate, both physically and financially, appears to have paid off.
The policy review by IRD and the Treasury entitled “Post-budget depreciation issues” broadly proposes retention of the status quo for commercial and industrial property, allowing depreciation to continue to be claimed on building assets such as lifts, air-conditioning systems, plumbing and electrical reticulation.
An analysis of eight recent commercial and industrial property depreciation valuations undertaken by Bayleys Valuations showed that between 32 percent and 87 percent of the total depreciation allowances currently claimed from combination of building and fit-out allowances were for the fit-out.
“Property depreciation allowances obviously won’t be as significant given the removal of building depreciation,” says John Freeman, depreciation expert and Wellington-based director for valuations and advisory services for Bayleys Valuations. “However, it is likely substantial portion of the depreciation that has been able to be claimed will continue to be allowed.”
However, Freeman says if no commercially acceptable segregation of commercial building fit-out from the building itself is undertaken such assets will be treated the same as the building, meaning zero rating in terms of depreciation claims.
“It therefore behoves all property owners 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.”