Deductibility of repairs and maintenance for commercial fit-out
Clause 14
Issue: Clarifying the application of proposed section DA 5
Submissions
(PricewaterhouseCoopers, Deloitte, KPMG, Argosy Property Limited)
The application of section DA 5 should be clarified to ensure that it only applies to previously separately depreciated items of commercial fit-out.
(PricewaterhouseCoopers, Deloitte, KPMG)
The drafting of the proposed section is inconsistent with, and overrides, existing case law because it addresses what asset (the commercial fit-out item) the repairs and maintenance expenditure relates to. Instead, it should state that the expenditure does not relate to the building. (Argosy Property Limited)
The drafting of the proposed section creates ambiguity by referring to “a building’s commercial fit-out” as the “item”. It could be interpreted as relating to the whole of the building’s commercial fit-out rather than each separate item of commercial fit-out. (PricewaterhouseCoopers, Argosy Property Limited)
Comment
The policy intent behind this change is to prevent taxpayers from claiming that capital expenditure is immediately deductible because it is repairs and maintenance on the building. Officials agree that clarifying the wording of proposed section DA 5 would better align the legislation with the intended policy outcome.
Recommendation
That the submissions be accepted.
Issue: Application date of proposed amendment
Submission
(Corporate Taxpayers Group)
The application date of the proposed section DA 5 should be changed from 1 April 2011 to the commencement of the 2012 income year in order to be consistent with recent changes to depreciation settings.
Comment
Officials agree that it would be desirable for this amendment to be consistent with previous changes to depreciation settings and to take effect from the start of the
2011–12 income year.
Recommendation
That the submission be accepted.
Issue: Request for Inland Revenue guidance
Submission
(PricewaterhouseCoopers)
Guidance on the interaction of proposed sections DA 5 and DB 65 would be of assistance to taxpayers. Section DB 65 provides an allowance to taxpayers who previously depreciated commercial fit-out items as part of the building, rather than separately. Specifically, guidance on whether or not section DA 5 will apply when a taxpayer is already utilising section DB 65 is requested.
Comment
If practical difficulties arise on the interaction of proposed section DA 5 and section DB 65, Inland Revenue would assist taxpayers through the usual channels for interpretive issues. Policy officials will alert the relevant unit that this is an area of interpretation taxpayers are interested in.
Recommendation
That the submission be noted.
Issue: Review of changes to building depreciation settings
Submission
(Deloitte)
The removal of depreciation on buildings fundamentally changed the depreciation environment for building owners. It would be worthwhile to carry out a post-implementation review of a number of prominent boundary issues that have been identified since the removal of depreciation on buildings.
Comment
The final stage of the Generic Tax Policy Process (GTPP), which governs the tax policy development process in New Zealand, involves a post-implementation review of new legislation, and identification of remedial issues required for the legislation to have its intended effect. Officials will continue to consider issues associated with the removal of depreciation on buildings as and when they arise.
Recommendation
That the submission be noted.