Earthquake Tax Relief
The Government has proposed changes to the tax legislation that will assist taxpayers in the upper South Island and ‘Greater Wellington’ areas who were affected by last year's earthquake and aftershocks. The changes will provide relief for taxpayers from depreciation recovery income triggered by an insurance pay-out on damaged assets.
The legislation will apply to buildings that need to be demolished, and for all other assets that are damaged beyond repair.
When you receive an insurance pay-out on a depreciated asset, you may have to pay tax on the depreciation recovered if you receive more than the current book value of the asset. This is because Inland Revenue ‘claws back’ any previous tax deductions allowed for depreciation of that asset.
This can create unexpected tax bills for business owners affected by last year’s earthquakes, as insurance pay-outs on insured assets may result in depreciation recovery income and therefore additional tax to pay.
Under the proposed changes, where insurance proceeds are used to acquire a replacement asset, depreciation recovery income will not be ‘clawed back’ when the insurance proceeds are received or when the damaged asset is replaced.
It is important to seek tax advice as the timing of deferred depreciation recovery income may influence whether or not you choose to replace the asset.
There also are additional rules which will cap the taxable income if the insurer deems an asset to be uneconomical to repair, or if an asset is repairable and the insurance payment exceeds the cost of repair.
For more information about how this proposed legislative change may affect you please contact your local BDO adviser.