Claiming depreciation

Question from CH updated on 1st March 2012:

I bought a house in November 2010 and didn't elect to depreciate the building and chattels. The house was rented from day one. I am now thinking of claiming depreciation of the chattels. If I claim the depreciation in the second year of purchase then will IRD deem that I have claimed depreciation for the first year as well if I sell the house after owing the house for two years? Will I be subject to capital gain tax?

Our expert Mark Withers responded:

If you don’t wish to depreciate an asset a written election is required which is non-revocable. If you fail to depreciate but have not lodged a written election then IRD are technically within their rights to impose a depreciation recovery on the depreciation you should have claimed. I have personally not seen this applied in practice though. The IRD does not consider it acceptable to break chattels out of an acquisition in subsequent tax years if they have not been identified in the first return following acquisition. New Zealand does not have a capital gains tax. Income tax is imposed on speculative land transactions if the property was purchased with an intention to resell. The actual timeline does not determine this but where the timeline is short you would be wise to consider how you might prove your intention if called on to do so. The onus of proof is with the taxpayer and IRD are very active enforcing the land tax rules at present since the creation of the property compliance division.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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