Changes to the depreciation rules

Sections EE 30, EE 31 and schedule 13 of the Income Tax Act 2007; sections 91AAF, 91AAG, 91AAG, 91AAH, 91AAH, 91AAK and 91AAM of the Tax Administration Act 1994; sections EE 25E, EE 26 and schedule 16 of the Income Tax Act 2004; sections EG 10 and schedule 16 of the Income Tax Act 1994; schedule 21 of the Income Tax Act 1976 and regulations 2, 3, 6 and 9 of the Income Tax (Depreciation Determinations) Regulations 1993

A number of technical changes to the tax depreciation provisions have been made to deal with administrative concerns and to clarify the law. The changes are consistent with the original policy intent of the tax depreciation rules.

Application dates

The new depreciation rules generally apply for the 2008-09 and later income years. However, a number of the changes apply from earlier income years, to address previous technical uncertainties or inconsistencies with the legislation.

Key features

Depreciation loading for assets with provisional or special rates

Section EE 31 of the Income Tax Act 2007 has been amended to clarify that depreciation loading is allowable, subject to the normal criteria, for assets if the depreciation rate is set by a provisional or a special rate determination. There had been a technical concern that the 20% depreciation loading may not have applied to assets that had a depreciation rate set under these types of determinations. This was because section EE 31 referred only to an "economic rate", which excludes "special rate" or "provisional rate". The same analysis also suggested that the rates set by provisional and special rate determinations are not economic rates. As such, taxpayers relying on such determinations may not have been entitled to depreciation deductions. Neither outcome was consistent with the original policy intent of the depreciation rules. For this reason, section EE 26 of the Income Tax Act 2004 has also been amended, with effect from the 2005-06 and later income years. 

Section EE 30 has been amended by adding the words "of cost" to subsection (1) paragraph (b). Without the addition of these words, it was not clear what met the definition of a high residual value asset. The amendment removes any possible inconsistency or ambiguity and applies from the 2005-06 and later income years.

Revoking outdated determinations

Subsections 91AAF(6) and section 91AAG(7) of the Tax Administration Act 1994 have been amended to give the Commissioner of Inland Revenue the ability to revoke outdated provisional rate determinations and economic rate determinations. This will allow the Commissioner to regularly update the list of depreciable items to ensure that it does not include items that no longer exist. Subsections 91AAK and 91AAM have been amended to include revoking a determination as part of the notification process. A revocation of a determination takes effect the day after the date of publication of the Gazette that contains the notification of the revocation.

Provisional and special rate determinations based upon statutory formulas

Changes to sections 91AAG(3) and 91AAG(4) of the Tax Administration Act 1994 clarify that provisional rate determinations and special rate determinations must be based upon the statutory formulas. Previously, there was no reference to the formulas that the Commissioner must use to set the rate under either a provisional rate determination or a special rate determination. The new rules make it clear that provisional rate and special rate determinations will be based upon the appropriate statutory formulas.

Applying for provisional rate determination

Subsection 91AAG(1)(b) of the Tax Administration Act 1994 has been amended to ensure that taxpayers can apply for a provisional rate determination - even when there is an applicable rate available. This ensures that the Commissioner can issue a provisional determination when the default rate is not broadly correct.

Changes to subsection 91AAH(3)(a) allow the Commissioner to decline to issue a provisional rate when the most appropriate default rate is "about right" for that type of asset. This is designed to reduce compliance and administration costs. The Commissioner can also decline to issue a provisional rate determination when the most appropriate default rate is clearly not broadly correct for that type of asset. That is to say, the Commissioner can decline to issue a provisional depreciation rate where the depreciation rate is less than 50% of the amount that is the difference between the default rate and the next highest or lowest rate, as applicable, in schedule 12 of the Income Tax Act 2007.

Assets acquired before 1 April 2005

A reference to section EZ 23 has been added to section 91AAG(3) to ensure that a special rate determination for assets acquired before 1 April 2005 are calculated under the depreciation rules that existed before the changes of 2005. As a matter of principle, special rate applications for assets held before 1 April 2005 ought to be determined using the earlier rules.

Reliance on previous economic rate determinations

Section 91AAF(3) has been amended to ensure that taxpayers can rely on previous economic rate determinations. Under the previous rules, section 91AAF(3) is intended to provide taxpayers with certainty that the Commissioner could not retrospectively change depreciation rates for assets already owned or under contract to purchase. However, section 91AAF(4) overrode section 91AAF(3), resulting in a technical argument that the Commissioner had the power to issue a determination that had retrospective application. This result was inconsistent with the original policy intent. The amendment clarifies the rule so that taxpayers can rely on previous economic rate determinations.

Depreciable land improvements

The following categories of depreciable land improvements have been added to schedule 13 of the Income Tax Act 2007 and, where appropriate, to earlier Income Tax Acts:

• pipes; and
• purpose-built surfaces for outdoor sports facilities.

The changes apply to the 2008-09 and later income years.

Updating Income Tax (Depreciation Determination) Regulations 1993

As a result of the Taxation (Venture Capital and Miscellaneous Provisions) Act 2004, some of the legislative references in the Income Tax (Depreciation Determination) Regulations 1993 were no longer correct. The regulations have been updated and references to sections 91AE and 91AJ have been amended to refer to sections 91AAG and 91AAL respectively.