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  1. #1
    Join Date
    Dec 2004
    Location
    Beautiful Waitakere Ranges
    Posts
    519

    Default Is my chattels valuation worthless??

    I'm putting together my tax returns here, and I've just spoken to the IRD regarding depreciation of some renovations I've completed in November last year.
    I was put through to their 'depreciation expert', unfortunately I don't recall his name but he sounded like he knew what he was talking about. He said that the new regulations are coming out soon, and that nearly all fixed items, such as electrical wiring, paint on the walls, tiles etc. etc. should be depreciated at the building rate of 4%...!! He made it clear that I should be doing this already know, since it was also the intention of the current regulations - the new bulletin will just be a sort of clean-up to simplify things.

    Now when I look at my nice chattels valuation which I just got some weeks ago, I see all these items such as non-loadbearing walls, wiring, paths and driveways and lots of others, all categorized and depreciating at specific rates way abowe the building rate of 4%. And I think they should, since they obviously wear out faster than the building - BUT If he's right it means that I can pretty much throw this valuation out of the window.
    I asked him then what about all those people who are currently using these valuations to maximise their depreciation, and his answer was that they are probably going to do investigations against them. It may be an empty threat, but who knows?

    Does anyone have any thoughts on this? Warren?
    High resolution Fractal Art on quality canvas: www.FractalArt.co.nz

  2. #2
    Join Date
    Jun 2005
    Location
    Auckland
    Posts
    5,086

    Default

    Yes, there are new rules, or clarifications of old rules, around, as there were last year.

    An accountant can take an agressive stance, and depreciate everything to the max, or a conservative approach and depreciate things in line with as-yet unvalidated guidelines.

    The chattels valuation is not worthless, because it will include genuinely depreciable things like carpets, stoves, TV areials, fencing etc., probably way above the 'chattels' component of the purchase price.

    cube

  3. #3
    Join Date
    Dec 2004
    Location
    Beautiful Waitakere Ranges
    Posts
    519

    Default

    I'm thinking of items such as paint, non-loadbearing walls, electrical wiring, plumbing etc. which can have a substantial value. Apparently they are meant to be depreciated at the building rate - also according to the curent rules. Only 'loose' items such as light fittings, stove, carpet etc. can be depreciated at a higher rate.

    I know there are different interpretations of the rules, but his message was pretty much that attemts to maximise claims will likely be investigated, even under the current rules. So I'm wondering what it's worth to have items like non-loadbearing walls with a substantial value identified separately when this is likely to be in violation with the rules, or lets say the IRD's interpretation of the rules?

    And how about fencing? Does it not last almost as long as the building? And driveways, do they wear out fast? I think they last a very long time, so are they really depreciable at a higher rate? I believe he meant that chattles are only the items you'll typically take with you when you sell the house i.e. all loose items, and then plus the carpet since it obviously wears out fast. All the rest goes on the building rate of 4%
    High resolution Fractal Art on quality canvas: www.FractalArt.co.nz

  4. #4
    Join Date
    Jun 2005
    Location
    Auckland, New Zealand
    Posts
    82

    Default

    Rolf

    What cube has said is correct. The PROPOSED changes have been around for some time but nothing definitive has been announced.

    Do NOT panic at this stage. Your report is still money well spent.

    I will answer all of your queries fully in the next 24 hours (I am out of the office at the moment)

    Regards

  5. #5
    Join Date
    Dec 2004
    Location
    Beautiful Waitakere Ranges
    Posts
    519

    Default

    Hehe I'm not panicing, I'm more frustrated about how different the existing rules are being interpreted
    I don't rely on the depreciation claims to have a sound business, but since the different interpretations give quite different results on the buttom line, I'm highly interested in your view on this Warren.

    Kind regards,
    Rolf
    High resolution Fractal Art on quality canvas: www.FractalArt.co.nz

  6. #6
    Join Date
    Jun 2004
    Posts
    10,404

    Default

    I get chattels valuations done. For things like non-load bearing walls, electrical reticulation and internal plumbing I just list seperately but depreciate at 4%. Bits like toilets and vanities etc I use the rate given. I depreciate fences and drives at the higher rate - they do wear out faster.

    As for penalising people for using the current 'rules' - a bit tough and unlikely I think given the numbers involved.

    Cheers
    Wayne

  7. #7

    Default

    I started devaluing using Chattels & Building fitout then realised
    a:that it was not all that clear on the IR260 (fitout appearing to be more a commercial structure issue)
    b: there were IRD issues over fitout
    So I spoke to my accountant who felt that it might be wise to devalue fitout at 4% until the issue was resolved. Eventually did parallel schedules, submitting those with the lower rate. Upside I guess is the properties will take longer to tax me. To be realistic I would have to concur with Wayne, it simply wouldn't be practical for IRD to pursue back taxes on this one, hopefully a definitive interpretation will be released soon.
    Bombus

  8. #8
    Join Date
    Oct 2003
    Posts
    3,578

    Default

    My opinion on what has been said above.

    The IRD have such powers that a bit of arrogance creaps in that what ever they say sounds like they know what they are talking about, even if they are completely wrong.

    The current rules are the current rules. Anyone who reads them can tell what they say. Whether that is what was intended is completely irrelevant. I beleive they are interpreted as intended but it was intended they only apply to commercial property, not residential.

    Legislation should be prospective, not retrospective. Legislation by Press statement borders very close to illegal but is the trend with governments around the world to plug up loopholes (ie. we are going to block this loophole from todays date but the legisation wont be drafted or legislated for months). Legislation by IRD employee in no official capacity has absolutely no bearing.

    Technically if you dont claim the full deprecation it is lost. They dont ever tell you that one when saying use a lower rate do they!

    Warren - what are the chances of there being a transition period or do you think the new rules will apply from a certain date, no questions (note there are already a couple of different depn regimes running side by side).

  9. #9
    Join Date
    Jun 2005
    Location
    Auckland, New Zealand
    Posts
    82

    Default

    Rolf,

    Thanks for the postings. As you would imagine this is an issue near and dear to our hearts!

    He said that the new regulations are coming out soon, and that nearly all fixed items, such as electrical wiring, paint on the walls, tiles etc. etc. should be depreciated at the building rate of 4%...!! He made it clear that I should be doing this already know, since it was also the intention of the current regulations - the new bulletin will just be a sort of clean-up to simplify things.
    We have received no direction from the IRD on current claims although many property investors are being audited. We are aware of several cases under review by the IRD but there have been no firm answers. We are currently involved, in a consultancy role, in a case that is going to the Taxation Review Authority to get a definitive answer. Basically there are major discrepancies between IRD and Property professionals (including some in the accountancy profession) over how the rules have been interpreted and this has now been going on for over 5 years.

    In January 2004 Valuit wrote to the Commissioner of the IRD seeking clarification on how we should proceed until such time as there is a definitive ruling one way or the other. The Commissioners response can be summarised as follows:

    The local offices of the IRD have been directed to wherever possible avoid assessing cases until IRD head office have been able to complete a review of the issue of building fit-out being claimed at the published rates by residential property investors. If an assessment must be made the local office have been directed to use the 4% Building rate for items of Fit-out and investors will be able to request a reassessment should the decision go in favour of the current interpretation.

    The new rules have only been proposed (as per the Depreciation Review Discussion paper issued in the middle of last year and with the closing date for submissions of 30 September 2004). To date we have heard nothing back on what the changes will be exactly and when any changes will apply. What we do know is that you will still be able to claim depreciation as you do now it will simply be a reduction in the depreciation rate for some items

    Now when I look at my nice chattels valuation which I just got some weeks ago, I see all these items such as non-load bearing walls, wiring, paths and driveways and lots of others, all categorized and depreciating at specific rates way above the building rate of 4%. And I think they should, since they obviously wear out faster than the building
    The main concern of the IRD seems to centre around half a dozen or so categories such as internal partitioning, electrical wiring, plumbing, telecommunication cabling. They appear to have no issue with other clearly identifiable chattel items such as, driveways, paths, stoves, TV aerials, letterboxes etc.

    BUT If he's right it means that I can pretty much throw this valuation out of the window.
    The current report is still useful it may just be some of the assets need to be reclassified back to 4% once a decision is finally made.

    An accountant can take an aggressive stance, and depreciate everything to the max, or a conservative approach and depreciate things in line with as-yet unvalidated guidelines.
    In response to another question in our letter on January 2004 the Commissioner advised that there was three ways to handle your depreciation in your tax return. These are:

    OPTION 1
    File their returns on a conservative basis (as per the advice set out in our IR 263 booklet) and wait for IRD head office to complete their review

    OPTION 2
    File their returns on a conservative basis and follow the disputes resolution process issue a Notice of Proposed Adjustment to the Commissioner;

    OPTION 3
    File their returns based the interpretation that has been held in the past. However you should be aware that unlike the first two options, this choice may expose taxpayers to the possibility of having shortfall penalties imposed. (Note: This is not a misinterpretation penalty and as mentioned above I believe IRD will have a hard time penalising all investors.)

    As Valuits expertise is in apportioning the purchase price and we are not accountants we have always advised that you to seek advice from a specialist property accountant prior to submitting any tax returns, and now is no different.


    I'm thinking of items such as paint, non-load bearing walls, electrical wiring, plumbing etc. which can have a substantial value. Apparently they are meant to be depreciated at the building rate
    Worst-case scenario is that if these half dozen items that the IRD are concerned with do have their rates reduced - it will take slightly longer for you to full depreciate these items. Our concern is that it is still a reduction now in the cash flow for the investor. It is better to have the money now than in 10 years time. Over the long term the buy and hold investor will still claim the same amount of depreciation.


    I believe he meant that chattles are only the items you'll typically take with you when you sell the house i.e. all loose items, and then plus the carpet since it obviously wears out fast. All the rest goes on the building rate of 4%
    Do not be fooled! At the end of the day your purchase price is split into three broad categories: Land (does not depreciate), Building structure (depreciates at 4%) and fit out and chattels (depreciate anywhere between 7.5% and 50%).

    The issue is over what is building structure. Can those things that the IRD believe are building structure items be clearly identified as separate assets or not. Anything else can be depreciated fully at the correct depreciation rate. At the end of the day property investment IS A BUSINESS. And as such it should be treated as such. Would you give me $10,000 for 15 years at 0% interest. No - you would not. It does not make commercial sense. You should be claiming depreciation on all those items that you can. How you do it (the three options noted above) is up to you and your tax advisor/ accountant. Do not let the frustration get to you!

    I'm more frustrated about how different the existing rules are being interpreted
    Agreed. It would be nice to have a definitive (and favourable) response.

    I don't rely on the depreciation claims to have a sound business
    Fantastic. We believe the depreciation benefits should be considered the icing on the cake and should not be relied up on. It is a nice bonus.


    Regards

  10. #10
    Join Date
    Jun 2005
    Location
    Auckland, New Zealand
    Posts
    82

    Default

    CJ

    what are the chances of there being a transition period or do you think the new rules will apply from a certain date, no questions (note there are already a couple of different depn regimes running side by side).
    A group of us that have been working closely had this question asked under Parliamentary questioning last year. The following is the Hansard from Parliament


    9911 (2004). Dr Muriel Newman to the Minister of Revenue (22 July 2004):
    In relation to proposals for changes to depreciation rates for rental property buildings contained in the officials paper “Repairs and Maintenance to the Depreciation Rules” what is the earliest date from which new depreciation dates are likely to apply?


    Hon Dr Michael Cullen (Minister of Revenue) replied: The Government has not considered whether there ought to
    be changes to the depreciation rates for rental property
    buildings. Officials have indicated a preference that as far as
    possible, any changes should not affect existing investments and
    have invited submissions on this issue. The Government awaits
    the outcome of consultation and officials' advice on the
    matters raised in the issues paper.


    We are still awaiting the "outcome of consultation and officials advice on the matters raised".

    Other than this we do not want to pre-empt what they may or may not do.


 

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