Findex: Will the removal of depreciation on commercial buildings cost you?

Chris Guillemot, accounting and business advisory partner, Findex Hawke’s Bay.

By Chris Guillemot, Accounting and Business Advisory Partner, Findex Hawke’s Bay

OPINION

As part of the tax reforms passed by the current Government, the ability to claim depreciation on commercial buildings has been removed with effect from the 2024-25 tax year by setting the depreciation rate to 0%. The ability to claim depreciation on residential buildings was removed in 2011.

What does this mean for you?

A first step would be to review your accounts to see what has been classified as a building, as it is possible some of the items may, in fact, not meet the definition of a building for tax purposes.

Things such as hay barns, pole sheds and farm outbuildings should continue to be eligible for a depreciation claim as the change affects all commercial buildings with an estimated useful life of 50 years.

The structures the Inland Revenue considers to meet this criteria can be found in their general depreciation rates guide (IR265) on pages 45-46.

Why could this change be significant or costly for you?

In past years you may have been able to claim a significant amount of depreciation on commercial buildings that is now denied for the 2025 tax year. This will likely result in an increase in your profit/ taxable income that will be reflected when annual year-end accounts are prepared.

This will be a real issue for large commercial property-owning entities such as corporate farms, and commercial property companies.

If your annual tax liability (before deduction of payments already made – that is, provisional tax) is in excess of $60,000 then you may have exposure to Inland Revenues Use of Money interest, even if you have been paying the instalments calculated on time.

As part of your 2025 year-end process that is normally done before the financial year finishes, such as stock counts, bad debt write-offs and other balance date issues, the value of any denied depreciation claim should also be calculated. This will then allow you to discuss with your adviser the impact on your final provisional tax payment due for the year (May 7, 2025, for March balance dates and July 28, 2025, for June balance dates)

If your prior-year depreciation claims have significantly reduced as a result of this rule change then you will be in a position to consider increasing that final tax payment. This will mitigate any exposure to use-of-money interest but should be considered in conjunction with your overall cash position and any cost of finance that you may incur.

For more information on this or to discuss your situation please contact your local Findex adviser at findex.co.nz.