Jul 03, 2020
Depreciation on Commercial Buildings
From the 2020-2021 income year onwards the IRD have changed the depreciation for commercial and industrial building. Previously, tax depreciation on all buildings was at 0%, this has been in place since 2011.
Now if your business is eligible, you will be able to claim depreciation deductions in your tax return for commercial and industrial buildings. These changes are to help:
with your business cash flow in the short-term
long-term economic recovery by encouraging you to invest in new and existing buildings.
The applicable depreciation rates introduced are 2% Diminishing Value (DV) and 1.5% Straight Line. Please note residential buildings are not part of these depreciation changes. This is because they depreciate at a much slower rate.
Low-value asset threshold for depreciation
Previously when purchasing an asset, anything over $500 excluding GST was capitalised and depreciated over a period of time determined by the IRD.
This threshold has temporarily increased from $500 to $5,000. This will allow you to deduct the full cost of your business assets with a value of less than $5,000 in the year you purchased them.
This change came into effect on the 17th March 2020 and is available until the 16th March 2021. For assets purchased on or after 17 March 2021, this threshold will be permanently increased from $500 to $1,000.
For example: You purchase a laptop $2,000 GST exclusive. Previously the maximum income tax claim would have been $1,000 now the full $2,000 is available.
Provisional tax threshold
Previously you automatically become a provisional taxpayer when your residual income tax (RIT) was over $2,500. This threshold has now been increased to $5,000. This means any current provisional taxpayers with provisional tax payments of less than $5,000 will have until 7 April the year after balance date to pay their tax bill. This is intended to allow businesses to retain cash for longer.
This is a permanent change that will take effect from the 2020-2021 income year. For most taxpayers, this will mean 1 April 2020. However, if you would like to continue paying in instalments throughout the year, you can make a voluntary payment to the IRD or put aside money in a bank account until your tax payment is due.
Wage Subsidy extension
From the 10th June – 1st September employers or a self-employed person can apply for an 8-week wage subsidy extension. The same rules apply as the initial 12-week subsidy however your business must have experienced a minimum 40% decline in revenue for a continuous 30-day period. This period needs to be in the 40 days before you apply (but no earlier than 10 May 2020) and must be compared to the closest period last year. The decline must also be related to COVID-19. You cannot apply for any employee until the initial 12-week subsidy has run out.
For example: If you apply on 30 June 2020, you might compare 31 May - 29 June 2020 with 31 May - 29 June 2019. However, it may be that another 30-day period will better reflect the decline in revenue. So, you could compare 31 May-29 June 2020 to 30 April-29 May 2019.
Loss carried back scheme
Businesses expecting to make a loss in either the 2020 year or the 2021 year can use that loss to offset profits they made the year before. In other words, they can carry the loss back one year to the preceding income year. This can be done before the loss year return is filed.
There are two ways to claim your loss carry-back:
1. Include the carried back loss in your tax return – the IRD will automatically refund any overpaid tax.
2. Ask for a refund of any provisional tax you have paid for 2020 if you are going to carry back a loss from 2021. We would recommend preparing a cashflow to support this option.
If you elect to carry back only part of the loss now, you can carry back the remainder anytime later in the year up until your return is due. Any balance remaining can be carried forward.
For example: 31 March 2019 you made a profit of $30,000 and paid tax of $8,400 (28c company rate). 31 March 2020 you made a loss of $15,000. You can carry back the $15,000 to offset against the $30,000 profit and receive a refund of $4,200.
Converting short-term rentals (Airbnb) to Long-term rentals
If you previously have been renting out your property as an Airbnb, you could be thinking right now is it better either leaving your property vacant or changing it to long-term residential rental. If you are in this position, take a moment to consider the GST implications.
Here is what the IRD say regarding the GST treatment where you have claimed GST on your property purchase:
- Long term residential accommodation is not subject to GST.
- Airbnb accommodation revenue (or revenue through other booking channels) can be subject to GST if revenue is over $60,000
- If you are registered for GST and change your activity to a non-GST activity, then you need to consider whether you will carry on another GST activity within the next 12 months.
If you are carrying on GST activity in the next 12 months
You do not need to cease your GST registration, however, you will be required to:
- Make a GST apportionment in the tax year that you change your activity to a non-GST activity. This reflects that the property was not used for a GST activity for a period of months.
- When you revert back to the GST activity again, you will be able to claim back the GST paid above. However, this will cross multiple tax years.
If you are not carrying on GST activity in the next 12 months
Then you are required to:
- Inform the IRD within 21 days of ceasing
- Repay GST on the properties market value at time of ceasing GST. This could be a massive cost to you!
An example of where you would not be conducting a GST activity in the next twelve months is where you have signed tenants on a lease of more than 12 months.
If you believe that any of the above may affect you, we recommend getting in touch with our team.