- Depreciation is a tax-deductible allowance for the reduction in value of certain depreciable fixed assets (such as motor vehicles, plant, equipment) due to the normal wear and tear or obsolescence.
- The rate of depreciation can be determined using the IRD Depreciation rate finder.
- Depreciation does not apply to intangible assets such as goodwill. However, some intangible assets may be amortised for tax purposes under the fixed life intangible property rules.
Working out depreciation
- There are two methods of applying depreciation for income tax purposes – straight line or diminishing value.
- The straight line method allocates depreciation at a rate calculated on the original cost of the asset.
- The diminishing value method uses the cost less accumulated depreciation as the amount depreciation is calculated on.
- Previously, buildings (with certain exceptions) were not able to be depreciated from the 2012 financial year. However, in 2020, IRD announced from the 2020/21 income year onwards (starting 1 April 2020), commercial and industrial buildings (non-residential) can be depreciated at 2% diminishing value and 1.5% straight line.
- In 2020, the Government also passed legislation to temporarily increase the low-value asset threshold for depreciation from $500 to $5,000. From 17 March 2020 to 16 March 2021, low-value assets costing $5,000 or less can be fully depreciated for tax purposes at the date purchase.
- From 17 March 2021, the threshold for low-value assets at the date of purchase will be $1,000 or less.
- A fixed asset costs $100 and has a depreciation rate of 10% straight line. The allowable depreciation for tax purposes is $100 x 10% = $10.00 each year.
- A fixed asset costs $100 and has a depreciation rate of 20% diminishing value. The allowable depreciation for tax purposes is $100 x 20% = $20.00 in year one, ($100 – $20) x 20% = $16.00 in year two, ($100 – $20 – $16) x 20% = $12.80 in year three, and so on.
Where a fixed asset is bought partway through a financial year, depreciation is calculated for the number of months left in the financial year including the month in which the asset is acquired.
- An asset is bought in July, assuming a March balance date. Depreciation would be calculated for nine months from July to March (inclusive).
Not all fixed assets are able to be depreciated for tax purposes (such as land).
- A fixed asset which originally cost $1,000 has a written down tax value (value after deducting depreciation claimed to date) of $500 is sold for $400. A loss on disposal of $100 has occurred which is tax deductible.
On the disposal of a fixed asset, depreciation ceases to be able to be claimed in the financial year (of disposal). An adjustment needs to be calculated of the profit or loss on disposal of the fixed asset, which is either taxable or deductible. Any disposal proceeds in excess of the cost of the fixed asset will generally be tax free.
- A fixed asset which originally cost $2,000 but has a written down value of $750 is taken to the tip and dumped. A loss on disposal of $750 has occurred which is tax deductible.
- A fixed asset which originally cost $5,000 but has a written down value of $2,000 is sold for $9,000. A profit on disposal of $3,000 has occurred which is taxable, and also a capital gain of $4,000 has been made which is tax free.
- A motor vehicle is used by Sam for both business use and private use. His total kilometres travelled are 10,000 kilometres per annum, with 6,000 kilometres for business use (60%). If depreciation based on 100% business use is $2,000, Sam would be allowed a tax deduction of $2,000 x 60% = $1,200.
Any fixed asset which is used both for business purposes and private purposes by a self-employed individual in business in their own name or in partnership with others, or by a trust, may only claim depreciation to the extent of the business use. For fixed assets owned by a company which are not used solely for business purposes, other tax rules may apply such as fringe benefit tax.