IRD's views on depreciation challenged

In an Exposure Draft released late last year the department argued "that the breaking down of a residential rental property into such separate items is not an approach that can be universally applied."

It first raised this view in 2007 and provoked a strong, negative reaction from investors and their professional advisers.

Institute of Chartered Accountants Tax Director Craig Macalister says the issue is still a mess and the department is "stubbornly" sticking to its view that investors should not be allowed to split out parts of a building for depreciation purposes.

The institute has a view that IRD's legal analysis of the situation is a little wanting and "ain't that strong."

He says a lot of the case law IRD relies on is based on earlier decisions relating to repairs and maintenance.

"We struggle with whether they are relevant or not."

John Lowthers, a director of chartered accountancy firm Lowthers Auckland, says in his submission to the department that the law "as it stands is clear and practical".

If you can separately identify an item of depreciable property, then a depreciation loss is allowed and that loss is calculated in accordance with the formula set out in the law.

Macalister says depreciation is a significant issue and one that has been "the most emotionally charged issue" for the institute's members.

The issue is also causing problems for investors. Since the department's earlier statement in 2007 some investors have changed their approach and not separately depreciated different parts of a building.

He says there is a "reasonably arguable position" that investors can continue with the approach to depreciate parts of a building at different rates.

A positive aspect of the latest Exposure Draft is that it has a proposed three step test landlords can use to work out their depreciation calculations.

IRD says it has had 11 submissions on last year's Exposure Draft.

Earlier story here