New Taxation Bill

Your questions answered

The new Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill came into effect on the 1st of April 2021. Below we’ve explained what it will mean for you if you are purchasing or selling a property and how you can use a model to fairly allocate the Property Cost Allocation for both parties. If you have any questions, please feel free to submit them in the form below.

A Property Cost Allocation (PCA) is the first step to taking full advantage of the IRD tax depreciation rates for building fit-out. Simply put, a PCA is the process of apportioning your property’s purchase price between the land, building structure and fit-out at current market value. The deliverable of this apportionment provides you with a summary of market values which can be used for a depreciation schedule.

This Act significantly alters the way that property purchase and sale prices are allocated. This affects sales and purchases entered into on or after 1 July 2021. Allocations can have a large impact on purchasers’ future tax depreciation claims and vendors’ tax depreciation recovery.

A PCA allows property owners to take full advantage of the IRD tax depreciation rates for building  fit-out. From the 2020-2021 tax year building structures can again be depreciated, but only at 2% Diminishing Value, or 1.5% Straight Line.

If the vendor and purchaser cannot agree on a purchase/sale price allocation, the new legislation requires the vendor to complete the apportionment, based on market value, within two months of the change of ownership. There is a constraint that overrides market value - the sale price for an asset cannot be below the vendor’s existing book value (this eliminates any deductible losses on sale for the vendor).

For vendors, depreciation recovery applies if an asset is sold for a price above its tax book value. If the vendor does not complete a market-based apportionment, the purchaser must do so, and notify Inland Revenue and the vendor. If neither party completes an allocation, the vendor is deemed to have sold the property at market value and the purchaser cannot claim any tax depreciation.

The vendor’s apportionment (which must be based on market value) will be accepted, but with the provision that the allocated costs cannot be lower than tax book values for fit-out or plant and equipment, and cannot result in losses on sale - which are tax-deductible (for most fit-out and plant assets). This overrides any market valuation. The allocation must be notified to Inland Revenue and the purchaser within three months of settlement and the purchaser must accept it. However, if the vendor doesn’t complete an allocation within that timeframe, then the purchaser can complete a market-based allocation, which will be accepted by Inland Revenue and must be accepted by the vendor.

Will a PCA benefit my property?

PCA can be applied in the following circumstances

Recently purchased buildings;

Newly constructed buildings;

All types of commercial property that have a reasonable amount of fit-out; office, retail, industrial and accommodation.

Benefits for you

A property cost allocation provides you with;

An accurate purchase price breakdown, ready to be used as a depreciation schedule.

All assets summarised into their IRD general depreciation rate asset categories so you can claim at the prescribed depreciation rate.

Your building’s fit-out and services have been identified by experienced plant and equipment valuers who know what to  look for.

Along with a summary, you will have a detailed schedule of your assets. This can be used as evidence if your depreciation schedule was reviewed by IRD.

If you decide to refurbish or write off assets, their value can be identified within the detailed schedule.

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