Depreciation on non-residential buildings
Depreciation for buildings in the tax base, other than buildings primarily used for residential accommodation, has been restored.
The amendment applies for the 2020–21 and subsequent income years.
A deduction for depreciation of buildings other than residential buildings is allowed from the 2020–21 income year. It applies to: buildings owned at the beginning of that income year; and to newly acquired buildings; and to capital improvements made to existing buildings.
The depreciation rate is 2% declining value or 1.5% straight line. This is a permanent measure.
Opening tax book value
For buildings owned in the 2010–11 income year, the tax book value for the beginning of the 2020–21 income year is:
the adjusted tax book value at the end of the 2010–11 income year, less fit-out deductions taken under the section DB 65 transitional rule if applicable; plus
non-deductible capital expenditure incurred with respect to the building from the end of the 2010–11 income year to the start of the 2020–21 income year.
For buildings acquired after the end of the 2010–11 income year, the opening tax book value for the 2020–21 income year is:
Straight line depreciation
If a taxpayer elects to use the straight line method, the building’s cost for the purpose of calculating the depreciation deduction would be the opening tax book value for the 2020–21 income year and not the original cost (if different).
If a building is sold, its depreciation recovery income would be calculated taking into account depreciation deductions taken before 2011–12 (if any) and depreciation deductions taken from 2020–21. The cost base would also reduce by the amount of deductions taken under the section DB 65 transitional rule.
A non-residential building is any building that is not a residential building.
A residential building is:
a dwelling as defined in Section YA 1; and
a building in which accommodation is ordinarily provided for periods of less than 28 days at a time if the building, together with other buildings on the same land, has less than four units intended for separate occupation.
The “dwelling” definition encompasses owner-occupied houses and apartments, and houses and apartments subject to residential tenancies.
The additional category including some buildings accommodating short-term stays is to ensure there is certainty that the definition of “residential building” includes buildings such as a bach that the owner uses but also rents out on a short-term basis, and also buildings used exclusively for some short-term accommodation provided by owners such as Airbnb properties. This is to make quite clear that such buildings remain non-depreciable. The less-than four units provision is meant to exclude larger commercial operations such as motels from being treated as a residential building.
Repeal of the 2010 transitional rule
As a result of reinstating depreciation on non-residential buildings, the transitional building fit-out rule introduced as part of the 2010 reforms is no longer be required. Accordingly, section DB 65 would be repealed, and the tax book value of the building adjusted for past DB 65 deductions.
Special depreciation rate
The ability to receive a special depreciation rate from the Commissioner is restored for non-residential buildings.
Increase in the provisional tax threshold
The residual income tax threshold for being required to pay provisional tax has permanently increased from $2,500 to $5,000.
The amendment applies for the 2020–21 and subsequent income years.
Increase in the low-value asset write-off threshold
The low-value asset write-off threshold is temporarily raised from $500 to $5,000, before decreasing to $1,000 on a permanent basis. This allows taxpayers to immediately deduct expenditure on assets that cost up to $5,000 (and subsequently $1,000) rather than depreciating them over the life of the asset.
The $5,000 threshold applies for property purchased on or after 17 March 2020 but before 17 March 2021.
The $1,000 threshold will then apply for property purchased on or after 17 March 2021.
Research and development tax credits - broader access to refunds
The application date for the broader refundability rules for R&D tax credits has been brought forward to apply from the first year of the R&D Tax Incentive scheme (they previously applied from the 2021 income year).
The amendment applies from the 2019–20 income year.
Previously, limited refundability rules applied in the 2019–20 income year (year one rules), which only allowed businesses that met certain corporate eligibility and R&D wage intensity criteria to access refundable credits. A $255,000 cap applied to limit the total amount of credits that could be refunded.
The broader refundability rules do not include the corporate eligibility and R&D wage intensity criteria, and replace the $255,000 cap with a cap based on labour-related taxes. These changes enable more businesses to access R&D tax credit refunds, and also enable more of these businesses to access greater amounts of refundable credits.
The broader refundability rules apply by default to all claimants in the 2019–20 income year, but businesses have the option of using the year one limited refundability rules if they prefer. A business will be asked to confirm which set of refundability rules they intend to apply to its claim when filing an R&D supplementary return.
All businesses will have to use the broader refundability rules from the 2020–21 income year onwards.
The broader refundability rules (default option)
The broader refundability rules apply from the 2019–20 income year, and apply by default unless a business chooses to apply the limited refundability rules in section LZ 14 (section LA 5 (4B), (5B), (5C), and (5D)).
A loss-making business can be eligible for R&D tax credit refunds provided it is eligible for the credit more generally. It can obtain R&D tax credit refunds up to a labour-related tax cap. The cap is made up of any labour-related taxes (PAYE, ESCT, and FBT):
paid by the business; and
paid by companies the business is controlled by or which sit within the same wholly-owned group, if these companies have allocated amounts to the business for the purposes of the cap.
No cap applies to refundable R&D tax credits paid to levy bodies, or derived from eligible expenditure on approved research providers.
The “transitional 2020–21 amount” portion of the refundability cap formula (see section 101 of the Taxation (KiwiSaver, Student Loans and Remedial Matters) Act 2020) is deleted. The “transitional 2020–21 amount” is not needed because businesses would be able to apply the year two broader refundability rules if they provide a better outcome for them in the 2019–20 income year.
The limited refundability rules
New section LZ 14 sets out the limited refundability rules, which businesses can choose to apply instead of the broader refundability rules if they prefer. A business can obtain R&D tax credit refunds under the limited refundability rules, provided it is a company and:
is in a tax loss position, or has insufficient income tax liability to utilise all of its R&D tax credits in the 2019–20 income year;
satisfies the R&D tax loss cash-out corporate eligibility and wage intensity criteria in sections MX 2 and MX 3;
does not derive exempt income, and is not associated with a person who derives exempt income;
is not a listed company, and is not associated with a listed company; and
does not have an outstanding tax liability.
Only the first $255,000 of the business’s R&D tax credits is refundable, which is the equivalent of $1.7 million of eligible expenditure. Any remaining R&D tax credits may be carried forward to the 2020–21 income year if the shareholder continuity requirements in section LY 8 are met.
Choosing between the year one and year two refundability rules
Businesses have the option of applying the existing year one limited refundability rules in the 2019–20 income year if they prefer (proposed new section LZ 14). Businesses may choose to use the limited refundability rules or the broader refundability rules in the
2019–20 income year, but they cannot use both. Only the broader refundability rules would be available from the 2020–21 income year.