How to reduce your tax on rental income using depreciation expense?

From 01 April 2011, depreciation on building and items attached to the building are depreciated at zero %, thus there is no deduction for you.

However, there are lots of assets in your rental property for which you can claim deduction and reduce your taxes.

Commissioner’s view (TIB vol 22 No 4 May 2010) on a depreciable asset is to follow a 3 step process to ascertain whether the assets are a part of the building or are individual assets.

Step 1 – Identify, if the item is in some way attached to the building or not. If the item is not attached then it is not a part of the building and can be depreciated. If the item is attached to the building go to step 2

Step 2- Is the item an integral part of the building, means without that building would not exist, then the item would be considered as a part of the building. If it is not an integral part of the building go to step 3

Step 3: Look at the difficulty involved in the removal of the item, and whether there would be significant damage to the building were the item not present in its current form. If the item is a part of the fabric of the building, then it is a part of the building for depreciation purposes.

The whole idea is to establish whether an asset is a part of the building or not, remember if this is a part of the building then it would be depreciated at zero % otherwise it can be depreciated for its expected useful life.

Depreciation is the medium to spread the initial cost of an asset over several years, as the benefit will flow through in x numbers of years rather than in a year of purchase.

Legislation itself does not specifically cover repairs or depreciation separately but they are interrelated to each other and are a part of general deduction rules. One of the key things to remember is only depreciable properties can be depreciated, normally they are expected to decline in value while used in deriving assessable income EE6 (1) ITA 2007 things like antique paintings cannot be depreciated.

Case law also confirms the notion of whole assets vs part of the assets, it was seen in Auckland Gas Co Ltd v Commissioner of Inland Revenue (2000) 19 NZTC 15,702 major improvement in gas pipeline was considered as a single asset.

Tips:

Next time when you are looking to replace your asset consider items that are segregated from the building which means they can be depreciated.  It is slightly interesting as well as tax law permits one asset to be depreciated over the other, such as free standing cooktop can be depreciated but the fixed cooktop cannot, or carpet can be depreciated whereas floor tiles cannot, free standing cupboards can be depreciated but inbuilt one cannot.

Items which may still be considered as depreciable property:

1. Carpet/blinds
2. Hot water cylinder
3. Security systems
4. Cupboards
5. Free standing cooktop
6. And many more

So purchase decision may result in a tax savings for you. We offer free consultation on your tax affairs so drop us a line we would love to hear from you.

In a next article, we will try to cover repairs & maintenance expenditure vs capital expenditure specifically for rental assets. This is also an interesting and tricky one and is interrelated to the notion of depreciation expense.

About the author:

Saurav Wadhwa is an Auckland based chartered accountant and a director of IBBZ Accounting Limited. Saurav is a tax specialist with Masters in Tax with Distinction (Auckland) and have 10 years of experience in the industry. He is very passionate about helping small business owners. His easy going personality and a friendly nature makes him easily approachable. For all your tax problems including overdue tax returns, management of tax debt, tax consultancy, and IRD audits & disputes  you can contact him at This email address is being protected from spambots. You need JavaScript enabled to view it.">This email address is being protected from spambots. You need JavaScript enabled to view it.  or 027 5555 458.

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Information above is provided for general use only, if you are intending to rely on any of the information above please consult with us or seek a professional advice. If information provided above result in any kind of loss to you we can not be held responsible.

Date: 03 February 2014