Tax Updates: 22 July 2024

Welcome to this week’s review of tax issues, where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].

Identifying property for depreciation purposes

Inland Revenue (IR) has released a draft Interpretation Statement (IS) titled ‘Income tax – identifying the relevant item of property for depreciation purposes.’ The issue covered by the commentary is important because it is first necessary to identify the relevant item of property to ensure it is a depreciable item and, if so, determine the applicable depreciation method and rate from which depreciation losses may be calculated.

The focus is on identifying a physical thing that satisfies a particular notion. That is, something that is an entirety by itself and not a subsidiary part of anything else. The following are indicators that an item under consideration is an item of separate ‘property’:

• The item is physically distinct from a wider asset of which the item might be a part – consider the ability to separately identify whether the item’s function is integral to the physical functioning of a wider asset, the degree of physical attachment between items;

• The item is (to some degree) functionally complete – can it function independently? This doesn’t mean it needs to be self-contained or used separately;

• The item varies the function of another item – if so, then it is likely to be considered a separate item.

On the other hand, indicators that an item under consideration is not an item of separate ‘property’, are:

• The item has a physical connection with other items – a degree of physical connection with other items may indicate that the item is not separate;

• The item is part of an integrated system – is the item part of an integrated system designed to function as a whole?;

• The item is a necessary part to complete something else – the item is unlikely to be a separate property if it is necessary to complete another item.

The IS also takes time to alert the reader to the need to consider their own fact set specifically and stresses that just because you may be able to find your item of property listed separately within the Commissioner’s schedule of deprecation rates does not automatically mean that your item is separate property.

The document is referenced as PUB00274 and is 40 pages long. Most of those pages are filled with commentary covering each of the above six bullet points, explaining each indicator at length, and including extracts from various court decisions to illustrate the meaning of various terms.

The last few pages of the IS provide seven examples (including glossy pictures – a first I can recall!) to illustrate the earlier commentary.

If you would like to comment on the IS, you must do so by 29 August 2024.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.