Depreciating commercial buildings, or not
Many of you will already be aware that the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, reinstated the previous depreciation rates for commercial buildings of 2% or 1.5%, which had been reduced to 0% for the 2012 income year onwards.
Now, I also hope that most of you are aware of the mandatory requirement to claim deprecation for an asset, and that you will be deemed to have claimed even if you have not, which naturally has consequences when you subsequently dispose of the relevant asset (depreciation recovery income or loss on sale).
This mandatory requirement can, however, be removed if you make a formal election to IR not to claim deprecation for the relevant asset, either at the time the asset is acquired, or retrospectively, but in this respect, only when there has previously been no deprecation claimed on the asset.
The reinstatement of the ability to claim depreciation for commercial buildings from the 2021 income year onwards, has triggered IR to issue draft QWBA ED0233 titled ‘Elections not to depreciate commercial buildings’, to provide guidance in respect of the mandatory requirements to claim deprecation unless the requisite opt-out election has been filed, and how the rules operate in respect of an asset who published rates have moved from 2%/1.5% to 0% to 2%/1.5% again.
So here’s the basic ABC’s:
- If you have filed an opt-out notice, it’s irrevocable, so the 2021 income year changes are just white noise for you. i.e., you can’t now commence claiming in the 2021 income year.
- Caution however, just not claiming no deprecation in a tax return does not correlate to a formal opt-out notice. You actually need to attach a formal note to the tax return or send a separate email/web message to IR, advising of the opt-out, and don’t panic if you haven’t to date, the retrospective election can be made at any time, including post the disposal of the relevant asset, provided depreciation has never been claimed on the particular asset.
- Equally however, if you were claiming depreciation on the asset up until the commencement of the 2012 income year, the change of rates from 2021 onwards is not a chance to reset your prior choice. The mandatory claiming requirement has continued between 2011 and 2021, just the rate was set at 0%. Consequently you will be deemed to have claimed post the 2021 income year onwards even if you do not actually make a claim.
- Finally, if you have not previously claimed depreciation on the commercial building, and mistakenly thought that simply filing the income tax return was the filing of the requisite opt-out notice, then a change of heart now could see you commence claiming deprecation from the 2021 income year onwards. You would then request IR to reassess back year returns (because you are deemed to have claimed in any event), however be mindful of the statute bar limitations (you may eventually have to declare deprecation recovery income for depreciation claims you have never actually received the benefit of).
Should you wish to make a comment on ED0233, the deadline is Guy Fawkes Day (can’t wait…not!).
Tax Bill first reading done and dusted
The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill (65-1) has passed its first reading and was referred to the FEC. The Committee’s report is due on 23 March 2022 (can’t wait to see that!).
Business debt hibernation
Just a reminder for your clients of this available regime for those who may be struggling to manage their debts, particularly due to the recent lock-down.
The basics of the scheme are:
- An arrangement is set up for the existing debts, e.g. paying creditors only a percentage of what the business owes them on time and delaying the rest.
- A business can get up to a month of protection while it sets up the arrangement. This means that most creditors cannot enforce their debts, e.g. applying for the business to be liquidated.
- If the creditors agree, a business can get a further 6 months of protection.
Now the business will still need to pay off its debts in full, and the scheme only covers existing debts and not any new ones incurred, and it does not cover obligations such as employee wages and secured creditors with GSA’s.
Full details, including eligibility criteria can be sourced here.
Accounting for wage subsidies and leave payments
IR has issued a reminder for self-employed persons and individuals who may have received the wage subsidy and/or other Covid leave payments, that the amounts received are compensation payments under s.CG 5B of the ITA07, and consequently need to be included in the income tax returns filed – in the ‘Other income’ box for the 2020 year, and in the ‘Government Subsidies’ box from the 2021 year onwards.
You can find more details here.
This article from the ‘A Week in Review’ newsletter was originally published Monday 27th September 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me email@example.com.
If you would like to receive these updates directly to your mail inbox, you can subscribe by clicking here.