Tax legislation has been passed confirming that depreciation will continue to be allowed on building assets such as lifts, air conditioning systems, plumbing and electrical reticulation on wide range of commercial property. In addition to office, retail and industrial buildings, this will include hospitals and other convalescent complexes, hotels, motels and other types of guest accommodation including serviced apartments and camping grounds.
Ross McKinley, tax partner with KPMG in Auckland, says disappointing aspect of the legislation is that it only allows non-residential building owners who, for compliance cost and other non-tax reasons have chosen not to split-out the fit-out component, to claim 15% of the tax book value of their buildings as the fit-out component. And then they can only depreciate it at maximum rate of 2% per annum.
McKinley says both the 15% fit-out ratio and the annual depreciation rate allowed on the fit-out component is too conservative which would appear to be supported by fit-out valuations undertaken by John Freeman, depreciation expert and Wellington-based director for valuations and advisory services for Bayleys Valuations Ltd.
“We have just finished analysing one of the biggest commercial property sales of 2010. It is evident that the purchaser’s loss of structure depreciation has been offset significantly by correctly segregating the fit-out component now and not accepting the 15% government allowance,” says Freeman. “The level of fit-out in this particular case was around 29% of the building’s purchase cost and that sum will be depreciating at about 9.4% per annum from now onwards.”
An analysis of eight other depreciation segregation valuations undertaken by Bayleys Valuations showed that that from 24% (for warehouse) to 55% (for hotel) of the total depreciation allowances claimed from combination of building and fit-out allowances were for fit-out. “In general terms, the fit-out depreciation achieved annually from purchase date onwards for these buildings is between 9% and 12% so the Government’s 2% annual allowance again seems very limited,” says Freeman.
It is important property owners wanting to maximise the after-tax return from their property investments get an allocation of cost between buildings and their fit-outs undertaken before April 1, where one is not already in place. For all new property purchases, assets should be correctly segregated by tax category at the date of acquisition.
“Building fit-out assets wear out and are regularly replaced for several reasons so claiming your tax depreciation entitlement on such assets is also sound business practice,” says Freeman.
