Grandparenting certain buildings as structures

Sections EE 37 and YA 1 of the Income Tax Act 2007

Inland Revenue's Public Rulings unit has recently released the interpretation statement Meaning of "building" in the depreciation provisions (IS 10/02). Under this statement, some items that were previously treated as structures will come within the meaning of "building". This means there will be a change to the way these investments are treated for tax depreciation purposes.

On 30 July 2009, following the release of a draft of this interpretation statement, the Minister of Revenue issued a statement providing that the existing treatment of any affected structure acquired on or before the day of the announcement would be grandparented. Accordingly, section YA 1 has been amended to include a definition for "building". This definition specifies that a building does not include these affected structures.

Key features

• Certain buildings that have been treated as structures and were purchased on or before 30 July 2009 will continue to be treated as structures for tax depreciation purposes.
• Any improvements to these buildings made after 30 July 2009 do not receive this grandparented treatment.

Detailed analysis

Certain structures purchased on or before 30 July 2009 are not "buildings"

Amendments to section YA 1 have introduced a definition for buildings, which specify that, in the depreciation provisions, "building" does not include a grandparented structure. This definition of "building" excludes "grandparented structures" from the common law meaning of "building". This definition is not intended to detract from the Commissioner's interpretation statement IS 10/02 Meaning of "building". Instead, the definition is intended to grandparent investments, made before 30 July 2009, in certain types of structures from the depreciation rules applying to buildings.

This means that these buildings will continue to be treated as structures for the purposes of the depreciation provisions (notwithstanding that they are buildings under the Commissioner's interpretation statement IS 10/02). For example, their relevant depreciation rates will still be set using the double-declining balance method, and losses incurred on disposal will remain tax deductible. If a grandparented structure is sold after 30 July 2009, it will lose its grandparented treatment and will be treated as a building.

The definition of "grandparented structure" is an item on the following list, provided its owner acquired it, or entered into a binding contract for its acquisition or construction, on or before 30 July 2009:

1. barns, including barns (drying)
2. carparks (buildings)
3. chemical works
4. fertiliser works
5. powder drying buildings
6. site huts.

More detail on the types of items covered by the definition of "grandparented structure" can be found in IS 10/02, available on Inland Revenue's website. For example, carparks (buildings) does not include a commercial building that contains carparks.

Some carparking buildings continue to depreciate

The grandparenting of carparking buildings, described above, means that carparking buildings purchased on or before 30 July 2009 are not subject to a 0% annual depreciation rate.

Improvements to grandparented structures building

Section EE 37 has been amended to provide that if a person owns a grandparented structure and they make improvements or enter into a binding contract to make them after 30 July 2009, the improvement must be treated as a separate item.

The effect of this amendment is that any new improvements to grandparented structures will be treated as buildings. This means, for example, losses on disposal of the improvements will not be available. In the case of carparking buildings, this means the annual depreciation rate of any improvements will be 0%.

Application date

The amendments apply from 30 July 2009.