Total Property - Issue 6 2017
Tax can be a complicated subject. Tax related to commercial property even more so. But claiming the correct level of tax depreciation on assets has become an essential tool for the viable economic future of any business, writes John Freeman
Generally, an asset, or fixed asset, is something that can't be claimed in full as a business expense. If you buy an asset, the value of the asset is the purchase price (excluding GST if you are GST registered). It is important to keep a record of your assets. Some people call this an asset register, others list the assets and call it a depreciation schedule.
However, assessing the value of a commercial property and the individual assets contained within it can be challenging. Here is what you need to know:
Because fixed assets generally last longer than a year, you can't claim their cost as a business expense all at once. However, as they wear out, you may be able to claim a percentage of their cost each year as a tax deduction.
The percentage amount of depreciation annually you are able to claim has to be in line with the document known as IR265 issued by the New Zealand Inland Revenue Department (IRD).
Depreciation allows a deduction for capital expenditure, where a deduction wouldn't normally apply and acknowledges that the asset will eventually wear out or become outdated.
For tax purposes, the reduced value of an asset is recognised by allowing a deduction against income for the depreciation of that asset from the time it is used in a business until it is sold, disposed of or discarded.
This means the cost of the asset will be written off over its useful life. Once the whole cost price of the asset has been written off, no further deduction is allowed.
Asset purchase price analysis
Asset purchase price analysis (APPA) uses appropriate and robust valuation methodologies to analyse then allocate a total asset purchase price to its individual components. The process is generally required subsequent to a business transaction where fixed assets have changed ownership or have been purchased by a tax payer.
The allocation process allows the identification and segregation of the individual components into their appropriate tax categories as prescribed by the IRD. This ensures that all tax payers claim the correct and optimum level of taxation depreciation for individual assets during the period of ownership.
Usually subsequent to an APPA review the tax payer’s overall depreciation claim is increased whilst maintaining compliance with current IRD guidelines.
Types of fixed assets that benefit from APPA
Generally, APPA can be utilised where the following fixed asset categories may have been involved in a business transaction where assets have changed ownership:
• Building structures; • Building fitout services, including lifts, air-conditioning and floor coverings; • Processing, manufacturing and engineering plants; • Restaurant, catering and administration equipment; • Hospital, rest home and clinical care facilities; • Hotel, motel and retail outlet chattels.
Where a purchaser pays one total price for a collection of assets, the IRD considers this one transaction. It may contain various components in respect of the assets purchased, either nominated as one amount or in some detail within the sales and purchase agreement.
Each overall transaction therefore must be fully analysed so that all of the component parts are allocated realistic individual purchase prices based on the total transaction and price paid.
Fractional analysis of only specific parts of the transaction is not acceptable to the IRD.
Therefore, all assets that form part of a business transaction must be individually reviewed and analysed before final purchase prices can be effectively allocated.
Any purchase price attributed to any asset or category should be reflective of the realistic market value for such items at the time of the transaction.
John Freeman is Bayleys director of valuations in Wellington.
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