Dunne: further Christchurch tax relief on depreciation

Revenue Minister Peter Dunne today announced proposed changes to depreciation rules aimed at giving Christchurch businesses further tax relief, but with two of the measures to be extended to general tax law.

He said Cabinet agreed yesterday to three proposed changes in the rules for the tax treatment of depreciation, specifically around rollover relief, timing of deemed sales of destroyed insured assets, and losses on buildings.

Mr Dunne explained that under normal tax laws, when the insurance proceeds of a destroyed asset exceed the tax book value of the asset the owner is taxed on depreciation recovered. (This is because too much depreciation has been claimed in the past and is often the result when destroyed assets are insured for replacement value).

Rollover relief will be allowed for buildings replaced with buildings within the zone under Canterbury Earthquake Recovery Authority responsibility.

Similar rules would apply for insurance proceeds on buildings held on “revenue account” so long as the replacement building is in the zone.

Rollover relief would also be allowed for plant and equipment replaced with other plant and equipment, with no restriction on where in New Zealand the replacement asset is located.

Mr Dunne said that a key factor of the changes is the allowing of a five-year period for acquiring replacement assets.

“This is to ensure that businesses can take the time they need to fully consider their position before they replace their assets,” he said.

“This special one-off rule acknowledges the sheer size and impact of the Canterbury earthquakes.

“We do not believe that the Government should collect a windfall gain from depreciation recovered where taxpayers use their insurance proceeds to replace assets destroyed by the earthquakes,” Mr Dunne said.

In terms of the timing of deemed sales of destroyed insured assets, at present an insured asset is deemed to have been sold when it is destroyed, he said.

Mr Dunne said the timing of a deemed sale can have significant implications for businesses, particularly for assets destroyed in the earthquake where the value of the insurance proceeds may not be confirmed for some time.

“It is therefore proposed that the time of sale be deemed to be the point when the insurance proceeds can be reasonably estimated,” he said.

Cabinet has also agreed to extend existing legislation for the write-off of buildings destroyed by an event beyond the owner’s control.

“Current legislation allows a write-off when a building is destroyed by an event such as an earthquake, but no deduction is allowed if it is destroyed because of an event, for instance, in a situation where it is demolished to allow a neighbouring building to be properly demolished,” Mr Dunne said.

The rollover relief is limited to assets destroyed as a result of the Canterbury earthquake and aftershocks. The other two measures – timing of deemed sales of destroyed insured assets, and losses on buildings – are improvements to general tax law and will be available to all taxpayers.

“We are introducing these measures because the current tax rules on depreciation in this situation would hinder recovery and growth.

“The measures I am announcing today will help allow businesses to get on with the business of recovering, and help businesses to invest in Christchurch’s future,” Mr Dunne said.

The new depreciation rules are expected to be enacted around July.

Full details of the proposed new rules are available in a fact sheet on the Inland Revenue policy website at www.taxpolicy.ird.govt.nz