3. Implementation issues for grandparenting depreciation loading
3.1 Depreciation loading accelerates the depreciation of eligible items by 20%. It only applies to items that meet certain criteria; for example, the item must not have been used in New Zealand before, it must not be a building or depreciable intangible property, and it must have been purchased after the beginning of the 1995/96 income year.
3.2 As part of the Budget 2010 tax package, depreciation loading was removed on a prospective basis from assets purchased after 20 May 2010. In other words, if a person was committed to purchasing an item of depreciable property on or before 20 May, it was intended that the item should continue to be eligible for loading. The specific rule introduced in Budget night legislation stated that an item would be eligible for depreciation loading if it was acquired, or there was a binding contract for its purchase or construction, on or before 20 May 2010.
3.3 Since this legislation was enacted, we have been made aware of two main situations where the application of this rule is unclear. The first of these is when a person begins to build an asset themselves, but had yet to finish it, prior to 20 May. The second is when a person enters into multiple contracts for a single item of depreciable property, with at least some of the contracts being binding on or before 20 May.
3.4 We are proposing a new grandparenting rule that would clarify how depreciation loading should apply in these situations. The rule should better reflect the policy intention that an asset should be eligible for depreciation loading if there was a commitment for its purchase or construction on or before 20 May.
3.5 The proposed rule is that, for an item of depreciable property to be eligible for depreciation loading, its owner would need to have:
- acquired the item on or before 20 May 2010; or
intend, on or before 20 May, to purchase or construct the item, and
- enter into a binding contract in relation to the purchase or construction of the item on or before 20 May 2010; or
- start construction of the item themselves on or before 20 May 2010.
3.6 Under this rule, intention could be demonstrated by the person having documentation that evidences that they had decided to purchase or construct the item (such as board approval for an item’s purchase or an approved purchase order). Alternatively, the person could sign a statutory declaration that states they intended to purchase or construct the item on or before 20 May 2010. This declaration would then have to be sent to the Commissioner.
3.7 It is important to note that, while having the kind of evidence mentioned above would usually be sufficient, the Commissioner of Inland Revenue must still be satisfied that the person actually had the intention to build or purchase the item on or before 20 May 2010. For example, the relevant manager of a company approves the purchase of a $1,000,000 item on 10 May 2010. However, the company’s usual process for a purchase of that size is that it needs to be approved by the board of directors, and this does not happen until 30 May. In this example it is unlikely that the company would have the requisite intention to purchase the item on or before 20 May, as it had yet to finish its usual process for approving such a purchase by then.
3.8 In this context, construction would mean that the physical process of assembly had started. It would also include physical processes necessary to begin assembly, for example earthworks that are needed to lay the foundations of a dam. However, it would not include activities such as applying for resource consents or drawing up plans for the item. This is because these steps are often part of the process of determining whether to start or continue a project, and so do not necessarily imply commitment.
3.9 Finally, this rule would only determine whether an asset is eligible for depreciation loading. For an asset to actually qualify for the accelerated depreciation rate that the loading provides, it would also have to meet the general depreciation loading criteria, such as being previously unused in New Zealand and not being a building.
3.10 Draft legislation that attempts to reflect the policy outlined above is contained in Appendix C.