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NZ Government tax on depreciation of Buildings

WHY DEPRECIATION ON BUILDINGS FOR BIG COMPANIES MEANS LESS PROFITS SHOWING ON THEIR ANNOUAL REPORTS INTO NZ?

Kiwi Companies are naturally upset as they see their net profits are dropping considerably as the flash buildings they used to depreciate by 10000$$$ each year now make there books look less attractive. It means telling investors to ignore the net profit after tax in company accounts and to look at the underlying profit? This means they now have to lobby international accounting bodies and the Government to change the policies as there paper money drops lower. The reason is simple: The Government's has eliminated tax deductions for depreciation on buildings with an expected life of 50 years. It is across the board as well and affects landlords who used many properties to get a tax relief but in a sense used a loophole to make further profits. But really do building depreciate in NZ---no way like land they increase over time??

 

   

 

 

An accounting standard requires a deferred tax liability to be set up representing the difference between the carrying values of buildings for accounting purposes and the value for tax purposes - now being zero. Some companies have adjusted their books to include deferred tax liabilities in excess of $millions in their accounts this year in the hope the Goverment will back track and allow them to say well I have this profit now. Rules will change for all such buildings from the 2011/12 income year. For most businesses they will be effective from 1 April 2011.

  • New Zealand buildings do not drop in value over time. The current depreciation allowances therefore give a tax preference to owning property. 
  • The new rules will better reflect how buildings actually change in value and make the tax treatment of property fairer compared to other forms of investments. This will encourage productive investment in the economy.

But its ironic to say the least that this adjustment has no bearing on the performance of any company, nor on dividends paid out to shareholders. Basically it is paper money saying this company looks good yet really has no bearing other than that making the company look pretty. It should have been booted out years ago. Remember well liabilities are a technical adjustment that is not payable but certainly makes the books look attractive to the investor and without, many companies look pretty sick. But then why should a highrise building thats maybe worth more than the assets of the business be used for net profits anycase??

  • These changes will affect landlords, property investors, property investment companies and some business owners, who can currently claim depreciation at 3 per cent (by the diminishing value method) or 2 per cent (by the straight line method) of the purchase price of their building. 
  • Building owners will still be able to claim deductions for repairs and maintenance, to maintain the condition and value of their properties. They will also still be able to claim depreciation deductions for "fit outs" not considered part of the building. The Government intends to review the treatment of commercial “fit out” and, if necessary, amend the rules prior to 1 April 2011 to address any uncertainty in this area.
  • Building owners will be able to apply to Inland Revenue for a provisional depreciation rate if they consider a class of buildings, has an estimated useful life of less than 50 years.
  • These changes will raise $685 million in 2011/12, rising to $690 million in 2013/14. 

Source: http://www.taxguide.govt.nz/building-depreciation-changes.aspx

 

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