Hoteliers, retailers and commercial office interior decorators look likely to get the reprieve they were looking for from new depreciation rules they feared would drastically raise the cost of maintaining modern premises.

However, grey areas are likely to persist for landlords whose repairs and maintenance could be counted as capital expenditure.

A joint Treasury and IRD discussion paper, released yesterday by Revenue Minister Peter Dunne, says there are fundamental differences between residential and commercial building fit-outs, with the value of fittings in commercial premises depreciating far more quickly and requiring a depreciation regime.

Changes announced in the May Budget this year left many grey areas for commercial property owners, most of whom are already booking one-off tax adjustments relating to the future non-depreciability of commercial and industrial building structures.

"The law would be changed to clarify that fit-out associated with commercial, industrial, recreational and certain short-term accommodation (for example motels, hotels, rest homes and hospitals) would be able to be separately depreciated," the discussion paper says.

Property Council New Zealand chief executive Connal Townsend said applying the same "three-step test" used for the fit-out of residential buildings to commercial property would have cost the sector at least $500 million.

Townsend said he was pleased the issues paper recognised commercial property fit-outs held more value than residential property and suffered more wear and tear.

Accounting firm KPMG welcomed the paper as a "step in the right direction."

"It is pleasing that officials have recognised that fit-out for commercial, retail and industrial property does not have a long life, and is periodically replaced due to factors such as obsolescence and changing tenants' preferences," said KPMG Head of Property, Ross McKinley.

"The findings will be welcomed by most property investors", as it would represent little change from current practice.

Grey areas are still likely to exist where it comes to, for example, repairs and maintenance on a residential investment property, the paper suggests, since residential properties will be outside the scope of the proposed new regime for commercial buildings.

"Defining the boundary between repairs and maintenance and capital expenditure is very difficult," the paper says.

"Ultimately, as with other issues associated with the capital/revenue boundary, it will be a question of fact. We do not propose to alter this boundary as part of this review."

Under the proposed regime, there would be no depreciation on the building frame, floors, external walls, cladding, windows and doors, stairs, roof, and load-bearing structures such as pillars in a commercial building.

- HERALD ONLINE /