In our February-March 2011 newsletter, we looked into the changes to the depreciation regime brought about in the May 2010 Budget introducing the zero per cent depreciation rate for buildings. We also highlighted some of the discrepancies that were created by the hasty legislation. This article expands on that as well as looks into the depreciation treatment of buildings acquired by a taxpayer on or before 30 July 2009.
Meaning of “building”
The Inland Revenue issued Interpretation Statement – Meaning of “building” in the depreciation provisions (IS 10/02) as part of the changes to building depreciation rules. It concluded that a building is a structure of considerable size, intended to last a period of considerable time, is generally fixed to the land on which it stands, enclosed by walls and a roof, and is a structure that can function independently of any other structure, but is not necessarily a physically separate structure.

The Inland Revenue further confirmed that a building has a useful life of 50 years or more if it has been built to stand that period of time, that is to say that even if such a building lasts or is intended to last for less than 50 years, its useful life will still be regarded as 50 years. For example, if a custom-made building is built with a commercial intent of lasting only 20 years, its depreciation rate is likely to remain at zero percent.
Grandparented Structures
One of the effects of this interpretation statement is that some structures that were not previously regarded as buildings now fall within the definition of “buildings”. There is taxation relief for such grandparented structures which were acquired on or before July 2009. They will continue to be depreciated at the old depreciation rates as they are specifically excluded from the definition of “building”.

Buildings to which grandparenting rules apply are:

  • barns;
  • car park buildings and pads;
  • chemical works;
  • fertiliser works;
  • powder drying buildings; and
  • site huts;

Since the grandparenting rule only applies to buildings acquired on or before 30 July 2009, any building acquired or building improvements made after this date are not covered by the grandparenting provisions.

Farm Buildings
Farming taxpayers, no doubt, will have many types of buildings on their fixed asset register. These buildings will typically consist of barns, main dwelling, cottages, milking sheds, shearing sheds, implement sheds, fowl houses, slaughterhouses, glasshouses, covered yards, livestock yards, herd homes, dependent upon their function, age, construction materials and/or invoice descriptions.

The interpretation statement IS 10/02 defines barns as:

…typically large structures. They provide dry shelter on farms for things such as livestock, grain, hay, farm vehicles, and equipment. They are constructed out of long-lasting materials, such as wood, corrugated iron, steel, or concrete and have walls and a roof.

Based on the above definition, just about all farm buildings that shelter livestock, farm vehicles, stock food, machinery or implements can continue to be depreciated (at 10 per cent on Diminishing Value method or seven per cent on Straight Line method). Those buildings that fall outside the definition of “barns” such as milking sheds, shearing sheds, wintering barns etc or are not covered by the grandparenting rules may find some tax relief under schedule 39 of the Income Tax Act 2007 (see below). Farm buildings that fail to meet both the grandparenting list and schedule 39 list such as cottages and dwellings, their depreciation rates is adjusted to zero per cent from the start of the taxpayer’s 2012 income year. Accumulated depreciation to 31 March 2011 will continue to be subject to the depreciation recovery rules for tax purposes.
Schedule 39 (Special Excluded Depreciable Property)
This Schedule provides a list of buildings that can continue to be depreciated irrespective of the date the taxpayer acquired them. Therefore it applies to all buildings acquired before 30 July 2009 (so long as they are not subjected to the grandparented rules) and those buildings acquired on or after 30 July 2009.

The list of buildings includes:

• carports (hired out to householders) • milking sheds
• portable huts • roofed livestock yards
• cool-stores and freezing chambers • wintering barns and simple loafing barns
• slaughterhouses on farms • milk powder buildings
• fowl houses • temporary buildings
• plastic hothouses and PVC tunnel houses • fish processing buildings
• glasshouses • tannery buildings affected by acid
• buildings affected by acid

The above buildings can all continue to be depreciated but depending on their acquisition date, the depreciation rates will differ. Buildings acquired before 30 July 2009 can be depreciated at their existing rates but the Inland Revenue Depreciation Tables must be consulted for buildings acquired after that date.

As can be seen, schedule 39 has a narrower definition of “barn” than the grandparented clause so only the “wintering or simple loafing” barns can be depreciated (at the Inland Revenue depreciation rates) that are acquired after 30 July 2009. If a new barn doesn’t meet this “wintering or simple loafing” barn definition per schedule 39, it cannot be depreciated. On a similar note, woolsheds are neither listed in schedule 39 nor appear to be “barns” for grandparenting provisions which means they are no longer depreciable.
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Client Newsletter. Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.