Clarification of building fit-out depreciation rules

There has been welcome clarification of the rules regarding the depreciation of commercial building fit-out this week.  The Revenue Minister released a joint Treasury and IRD discussion paper on Wednesday that said a commercial building includes only structural items such as foundations, framing, walls and the roof, rather than the fit-out.

This has become an area of concern for commercial property owners since it was flagged in the 20 May budget that the ability to depreciate commercial and residential property would be axed.  Since the budget it has been unclear whether fit-outs on commercial buildings would be dealt with in a similar manner to residential property. 

In the case of residential properties, many chattels are considered to be part of the building and therefore not able to be depreciated under the new depreciation rules.

The discussion paper states “The law would be changed to clarify that fit-out associated with commercial, industrial, recreational and certain short-term accommodation (for example motels, hotels, rest homes and hospitals) would be able to be separately depreciated.”

The rationale for treating chattels differently in commercial versus residential properties appears to be that there are fundamental differences between residential and commercial fit-outs, with the value of commercial fit-outs depreciating more quickly justifying a depreciation regime.

This appears reasonable from the point of view of commercial property owners.  After all, fit-outs have a significant cost and often don’t survive longer than an individual lease contract which may be as short as six years or less.  Whereas much of a residential fit-out can last as long as the building itself.

This removal of depreciation on buildings will heighten the importance of the distinction between capital expenditure and repairs and maintenance – an area which can be rather grey.  With repairs and maintenance typically being 100% tax deductible – and capital expenditure potentially not even depreciable, the stakes have become higher with regards this distinction.

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