Depreciating commercial buildings, or not

Many of you will already be aware that the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, reinstated the previous depreciation rates for commercial buildings of 2% or 1.5%, which had been reduced to 0% for the 2012 income year onwards.

Now, I also hope that most of you are aware of the mandatory requirement to claim deprecation for an asset, and that you will be deemed to have claimed even if you have not, which naturally has consequences when you subsequently dispose of the relevant asset (depreciation recovery income or loss on sale).

This mandatory requirement can, however, be removed if you make a formal election to IR not to claim deprecation for the relevant asset, either at the time the asset is acquired, or retrospectively, but in this respect, only when there has previously been no deprecation claimed on the asset.

The reinstatement of the ability to claim depreciation for commercial buildings from the 2021 income year onwards, has triggered IR to issue draft QWBA ED0233 titled ‘Elections not to depreciate commercial buildings’, to provide guidance in respect of the mandatory requirements to claim deprecation unless the requisite opt-out election has been filed, and how the rules operate in respect of an asset who published rates have moved from 2%/1.5% to 0% to 2%/1.5% again.

So here’s the basic ABC’s:

• If you have filed an opt-out notice, it’s irrevocable, so the 2021 income year changes are just white noise for you. i.e., you can’t now commence claiming in the 2021 income year.
• Caution however, just not claiming no deprecation in a tax return does not correlate to a formal opt-out notice. You actually need to attach a formal note to the tax return or send a separate email/web message to IR, advising of the opt-out, and don’t panic if you haven’t to date, the retrospective election can be made at any time, including post the disposal of the relevant asset, provided depreciation has never been claimed on the particular asset.
• Equally however, if you were claiming depreciation on the asset up until the commencement of the 2012 income year, the change of rates from 2021 onwards is not a chance to reset your prior choice. The mandatory claiming requirement has continued between 2011 and 2021, just the rate was set at 0%. Consequently you will be deemed to have claimed post the 2021 income year onwards even if you do not actually make a claim.
• Finally, if you have not previously claimed depreciation on the commercial building, and mistakenly thought that simply filing the income tax return was the filing of the requisite opt-out notice, then a change of heart now could see you commence claiming deprecation from the 2021 income year onwards. You would then request IR to reassess back year returns (because you are deemed to have claimed in any event), however be mindful of the statute bar limitations (you may eventually have to declare deprecation recovery income for depreciation claims you have never actually received the benefit of).

Should you wish to make a comment on ED0233, the deadline is Guy Fawkes Day (can’t wait…not!).