If you are a self employed individual or an SME, it’s likely you’ll have purchased some fixed assets for your business. While TaxSnaps can help you securely store your invoices and receipts (check out how our IRD approved cloud expense software works here), it’s important to know how fixed assets and depreciation relate to each other.
Fixed assets can generally be described as business assets that you expect to use for more than a year and that cost over $1,000*. The cost of most fixed assets can’t be claimed as an expense against your income. Instead you claim depreciation on the fixed assets in your annual income tax return.
A depreciation deduction for a particular asset is only allowed once you own the asset and it’s used or available for use in deriving your gross income or in carrying on a business that aims to generate your gross income.
Depreciation allows a deduction for capital expenditure, where a deduction wouldn’t normally apply and acknowledges that the asset will eventually wear out or become outdated.
For tax purposes, the reduced value of an asset is recognised by allowing a deduction against income for the depreciation of that asset from the time it is used in a business until it is sold, disposed of or discarded.
This means the cost of the asset will be written off over its useful life. Once the whole cost price of the asset has been written off, no further deduction is allowed.
* Generally low value assets can be written off in the
year of purchase or creation based on the following
- Up till 16 March 2020: Up to $500
- 17 March 2020 to 16 March 2021: Up to $5,000
- From 17 March 2021: Up to $1,000
Main features of depreciation law:
- You must make depreciation deductions each year, unless you make an election with the IRD not to treat a particular asset as depreciable.
- You can only claim a depreciation deduction once you own the asset and it’s used or available for use in deriving your gross income or in carrying on a business that aims to generate your gross income.
- Depreciation is calculated according to the number of months in an income year you own and use the asset.
- From the 2011–12 income year, depreciation on buildings was reduced to 0% where buildings have an estimated useful life of 50 years or more. This applied to both commercial and residential properties including leasehold property. However, from the 2021 income year depreciation on nonresidential buildings has been reintroduced (those that are not primarily used for residential accommodation).
- You may not claim depreciation in the year you dispose of any asset.
- Expenditure for repairs and maintenance can be claimed as a deduction through business accounts. Anything more than repairs or maintenance is capital expenditure and isn’t deductible, but will be subject to normal depreciation rules.
- Both straight line and diminishing value methods are available for calculating depreciation on most assets and you can switch freely between the two.
- Assets that cost or have an adjusted tax value of $5,000 or less can be depreciated collectively, rather than individually, using the “pool” depreciation method.
- Subject to certain rules, assets costing $1,000 or less (purchased from 17 March 2021) can be written off in the year of purchase or creation.
- Certain intangible assets first used or available for use after 1 April 1993 have been brought into the depreciation system. Intangible assets with a fixed life must be depreciated using the straight line method.
- Gains on sale or disposal must be recognised in the year of sale. Losses on sales of depreciable assets, other than buildings, are deductible in the year of sale.
- There are restrictions on the depreciation deductions that can be made to depreciable assets transferred between associated parties.
- Removal of 20% loading – the 20% depreciation loading has been removed and will only apply to eligible assets with binding contracts for purchases that were entered into on or before 20 May 2010.
- The list of depreciation rates can be found on the IRD website in the IR 265 guide.
GST and depreciation:
- If you’re registered for GST (goods and services tax), you can generally claim a credit for the GST part of an asset’s cost price. You calculate depreciation on the GST-exclusive price of the asset.
- If you aren’t registered for GST, you base your depreciation on the actual price you pay for an asset, including GST.
- For assets that cost $1,000 or less: if you’re GST-registered, the $1,000 is GST-exclusive and if you’re not GST-registered, the $1,000 is GST-inclusive.
Straight line depreciation method:
Depreciation is calculated on the original cost price of the asset, and the same amount is claimed each year. If you’re registered for GST, the cost excludes any GST you’ve already claimed in your GST return.
Diminishing value depreciation method:
The amount of depreciation is worked out on the adjusted tax value of the asset. This value is the original cost, less any depreciation already claimed in previous years. If you’re registered for GST, the original cost price shouldn’t include GST you’ve already claimed in your GST return.