Depreciation of Commercial Fitout

Depreciation of Commercial Fitout – The Department’s View

The Inland Revenue Department has just issued an Exposure Draft on whether a taxpayer can re-characterise a part of a commercial building into fitout components to claim depreciation on those items formerly identified as being part of the building.

The Department’s view (in the Exposure Draft)  is that once an item of depreciable property has been identified and depreciated as a building, a taxpayer cannot subsequently recharacterise that property as building fitout.

The Exposure Draft appears to be light on technical analysis, taking the view “it is implicit in the depreciation rules that once the depreciation programme has began for an item, the treatment of that item does not change”.

We do not necessarily agree with that view as the depreciation rules provide that a person can choose which depreciation method they wish to use annually, and the depreciation method includes the depreciation rate. It will be interesting whether submissions (due by 18 November 2011) will have a sufficient technical basis to persuade the Department their view is not sustainable.

In the meantime taxpayers are on notice, and the Department states in the Exposure Draft that taxpayers who have chosen to retrospectively split out commercial fitout previously depreciated at the building rate should make a voluntary disclosure to the Commissioner.  Once the Exposure Draft is finalised, we suggest taxpayers in that situation seek advice as to their options and any taxpayers considering a split out now should either wait or seek a fully researched tax opinion.

Keith Turner