Our Experts Answer:
Sections EE45(3) and EE45(10) are relevant to your question. They allow IRD to adjust the value attributed to an item of depreciable property where the value attributed is not "market value". I.e. you must dispose of the items at market value and retain evidence of how you have established market value. Often a value is placed on the chattels in the sales and purchase agreement, but unfortunately where items are being sold with the overall property sale, even doing this is not conclusive. This is because it can be argued that the parties were not on "even footings" when negotiating because the tax outcome motivating the vendor to accept a low figure often has no bearing on the buyer meaning the agreed price is not necessarily the "market value" required by EE45(10). This issue was examined in the Privy Council case of Hansen in 1973 where a farm was sold including livestock and the parties negotiated apportionment of the assets with tax outcomes in mind. The court held the legislation could override the agreement between them. The court also suggested in Hansen that a scaling down approach may be appropriate where the value of all assets is aggregated and the sale proceeds apportioned across this aggregation of market values. If this approach was taken in your case depreciation may well be recoverable on the chattels. You should also consider that the IRD's view of what chattels can be separately depreciated has changed since you acquired these assets ten years ago. For example, internal partitions and electrical reticulation used to have a higher depreciation rate as an item of building fit-out, but IRD will no longer accept that an item that is attached and integral to the building is separately depreciable. I suspect therefore that if your chattel list contains items that they believe are part of the building asset they would expect to see this depreciation fully recovered as part of the building sale. That said, if you are going to take a tax position that contends your chattels now have a market value less that their book value I recommend you assemble strong evidence to support the position. This might include an independent valuation from a plant and machinery valuer. At the end of the day, if your tax on the recovery of the chattel depreciation is $3,300 you can justify spending some money to prove your market values.
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