Unformatted text preview: ACIS 254: ACIS Introduction to Taxation Introduction
Lecture 28: Depreciation and Leases
Department of Accounting & Department Information Systems, University of Canterbury, Christchurch Christchurch 1 Outline of Lecture
Depreciation History Depreciation Reforms Recent Reforms Depreciable Property Depreciation Rates Annual Depreciation Deduction 2 Outline of Lecture (continued)
Depreciation Methods Depreciation Fixed Life Intangible Property Adjustment on Disposal Election not to depreciate Leases
Operating Lease (previously nonspecified lease) Accounting Process Accounting Finance Lease (previously specified previously lease) lease Accounting Process
3 Topic 1: Depreciation Topic
• • •
First depreciation regime enacted in 1894 Old, transitional, new and revised regimes. Old, Assets governed by regime depending upon: (1) date of purchase, and in some circumstances, (2) regime elected to be applied. Subpart EE Income Tax Act 2007. Subpart Allowance for loss in value of an asset which cannot be Allowance made good by repairs and maintenance. • • 4 Depreciation
• • • •
Depreciation arises through use of asset in Depreciation producing income; if business & private purposes – apportionment takes place. apportionment Erosion of usefulness of asset by applying asset in Erosion producing income, not erosion in value solely due to changed market - TRA Case G11 (1985). TRA Depreciation cannot extend beyond cost of asset. Depreciation Anti-avoidance – Section GB 33 enables CIR to Anti-avoidance disallow a depreciation deduction if arrangement to defeat the provisions exists. defeat
5 Depreciation Reforms
• Major reforms commenced 1 April 1993
• Initial Changes: Initial
(1) Definitions of depreciable property (2) New depreciation rates including economic rates (2) (3) Option to use straight line, diminishing value or pooling methods. (3) (Pooling method permitted for assets costing up to $2,000, purchased on or after 1 April 1993). purchased (4) Deduction for repairs and maintenance: ss. DA 1 - DA 4. (5) Mandatory requirement to provide for depreciation; previously (5) allowance at CIR’s discretion.
• Unsatisfactory records, section DE 4(2) ITA 2007, limited to 25% of full Unsatisfactory rate. rate. • On sale, depreciation deemed to have been claimed - s. EE 1(2) ITA 2007
6 Depreciation Reforms (continued)
(6) A provision for depreciation on certain intangible (6) assets. (7) Various assets under $200 each were deductible in full (this threshold has now been increased to $500 from the 2005/2006 income year). (8) Depreciation calculated on number of months asset is owned rather than a six monthly basis. (9) Various transitional provisions, with effect 1995/96. 1995/96.
7 Further Reform
• Post-implementation review include:
(i) (ii) technical changes to pooling method. technical additions to list of depreciable additions intangible property e.g. copyright on publicly released sound recordings. released (iii) Correction of several drafting errors. (iv) Tightening of restrictions for transfers of depreciable Tightening property between related parties. property (v) Clarification of ‘used or available for use’. (vi) Ability to elect to exclude assets from regime.
8 Recent Reforms • Issues paper July 2004 and legislation (March • • • • • •
2006): 2006): Depreciation rules distorted investments decisions. Faster rates of depreciation – double declining Faster balance - plant & equipment. balance Split out building components. Residential rental property – separate components Residential & depreciate separately or include all assets as part of building. of Technical changes – pollution, patent claims, Technical depreciable intangible property, loss on destruction buildings from natural disaster buildings Apply from 2005-06 year.
9 Depreciable Property
• Property which might reasonably be expected, in Property
normal circumstances, to decline in value while used or available for use in production of assessable income. Includes: buildings, fixtures on land, land improvements (ss EE 6 and YA 1) improvements Certain intangible property (e.g.: rights to use Certain copyrights, patents, licences, etc). Schedule 14. copyrights, Excludes: Trading stock, land, financial arrangements, & certain other property. (EE 7 and YA 1) certain
10 10 • • • Depreciation Rates
• Options for rates depends on when purchased: Options
(1) assets acquired from 2005/06 income year (1) (2) assets acquired in 1995/96 year to end of 2004/05 year (3) assets acquired 1/4/93 to end of 1994/95 year (3) (4) assets acquired before 1 April 1993 • Economic rates set by CIR in a determination. Economic • Special & provisional rates available; taxpayers may Special
request, at a cost, to have special rate set by CIR. 11 11 • Calculated on monthly basis from date of acquisition to Calculated • • • • • • • •
balance date, & in each year excepting year of disposal balance ss. EE 14-16: Formula is: a x b x c / 12, where: ss. 12 where: a = the depreciation rate the b = adjusted tax value (DV) or cost (SL) adjusted c = no. whole/part months asset owned in income year. Adjusted tax value - cost price - depreciation: s. YA 1. Calculated on disposal of asset even if insufficient Calculated depreciation deductions claimed. Vital to claim mandatory depreciation deductions. Only when asset is actually used, available for use.
12 12 Annual Depreciation Deduction Annual Depreciation (continued) Annual
• Apportionment for private use: when business & • • • • •
private use: to reduce depreciation for tax purposes; if fringe benefit tax is applicable, no apportionment. fringe Calculated: as if asset 100% for business use & only Calculated: business portion claimed. Deduction formula: business d x f / g, where: d = amount of depreciation loss (a x b x c / 12) f = no. of days/unit asset used/available for business use g = total no. of days/unit asset available/used, whether total or not for business purposes. or
13 13 Depreciation Methods: Cost Price
• Straight Line - flat percentage of historical cost Straight • Previously only buildings, now option for most assets. Previously • If NZICA recommends / prescribes SL depreciation for If • • •
external financial statements; no concern tax accounting. external 1/12 of years' depreciation for every month asset used. 1/12 If separate land/buildings cost figures not known, GV If may be used. may Note recent changes for buildings.
14 14 Depreciation Methods: Diminishing Value
• Used for plant where more of usefulness of asset is Used • • •
consumed in earlier years & residual value expected. Depreciation based on declining balance of asset Depreciation rather than fixed annual amount. Claimed for each month asset Claimed is owned on adjusted tax value at beginning of that month. Temporary buildings are Temporary depreciated as plant.
15 15 • Low valued assets, ATV/cost $2,000/less: ss. EE 21-24. Low • More than one pool. Lowest single rate applying to any More • • • • • •
one asset in pool applies to the entire pool. one Compliance costs. Deductions on last day of year: a x ( b + c ) / 2 x d / 12, where: a = applicable lowest DV rate for assets in the pool. b = adjusted tax value of pool at start of income year. adjusted year. c = adjusted tax value of pool at end of income year (after additions/deletions to pool accounted for). d = no. of whole/part months pool existed in year.
16 16 Depreciation Methods: Pooling Fixed Life Intangible Property
• Intangible property whose life is limited by law or Intangible • • • •
contract to a number of months or years. contract Depreciated by SL method by: 1 / Legal life. Legal life is the remaining period of legal life. Examples in NZT 9.14 and 9.15. Note that costs are allocated initially on the basis Note of the legal life and additional costs are allocated to any extension of that legal life. allocated 17 17 Adjustment on Disposal and Adjustment Acquisition of Assets Acquisition
• Adjustment on Disposal: • Asset is sold, with loss or gain on book value for tax sset • • • • • •
purposes. purposes. Depreciation recovered in the year of sale or disposal. Depreciation Total depreciation recovered is income in year of sale. Total Gains are taxable but losses are deductible. Acquisition of Assets: Restrictions if the sale between associated persons. Special provisions for the transfer of property as part of a Special matrimonial transfer. matrimonial
18 18 Election not to Depreciate
• Taxpayer may elect for an asset not to be depreciable Taxpayer • • • • •
property. property. Election can be made when depreciable property Election acquired or change in use. acquired Can elect retrospectively – year acquired/into tax base. Can Policy: relief to taxpayers who would otherwise be Policy: subject to an unexpected depreciation recovery on the eventual sale or deemed disposition of the property. Also temporarily rented property – e.g. private Also residence. residence. Cannot pick and choose the years for depreciation. Cannot
19 19 Topic Two: Leases
• Finance leases - were specified leases until specified • • •
20/5/99 20/5/99 Operating leases - were non-specified leases until 20/5/99. until An operating (previously a non-specified) An lease is: lease One on personal property and a lease that is One not a finance (previously specified) lease not 20 20 Accounting Process - Operating Leases • Amount deductible to lessee is determined by (s. EJ 10 Amount • • • • • • •
ITA 2007): ITA a / b x c, where: a = part of the lease term in that tax year. b = lease term. c = total lease payment. Lease payment: only deduction for lessee. Lease Lessor returns lease payments when derived as income Lessor and claims depreciation in the normal way. and Not applicable to real property, livestock or bloodstock.
21 21 Finance Leases on or after 20 May 1999
1. 2. 2. 3. 3. 4. Ownership of the lease asset is transferred to Ownership lessee or an associate at the end of lease term; Lessee (associate) has option of acquiring Lessee lease asset for an amount likely to be substantially lower than the lease asset’s market value on date of acquisition; Lease term more than 75% of lease asset’s estimated useful Lease life (formula in s. EE 63 ITA 2007). life Entered into after 20 June 2007…involves use of asset outside Entered New Zealand for all or most of the lease, involves income of any person who is not the lessor that is exempt, excluded or non-resident’s foreign sourced income and is a finance lease under NZIAS 17 for the lessor, or in the same group of companies…and derives assessable income….persons who do not include the lessor bear substantially all the risks and rewards incidental to ownership of the lease asset…. Finance lease - a sale & purchase of leased asset. Finance
22 22 • Finance Leases on or after 20 May 1999 Finance (continued). (continued).
Commencement of lease: (1) Lessor records loan to lessee of cost price of asset. (2) Lessee records capital expenditure of cost price of (2) asset. asset. During the lease term: During (1) Lessor treats income from lease as interest income. • Total income over lease term is: • Sum lease payments + GRV (if any) - cost price Sum
23 23 Finance Leases on or after 20 May 1999 Finance (continued). (continued).
• Total income allocated to Total
income years covered by lease: income (i) balance outstanding at end (i) of each period, or (ii) any other common method, e.g. rule of 78 (Sum of the Digits), Straight Line. the (2) Lessee claims as deduction: (i) amounts deemed interest income to the lessor & (ii) depreciation claimed in (ii) normal way.
24 24 Key Points - Depreciation
• Note carefully the applicable dates for the reforms • • • • •
& when the asset was acquired/used, or available when for use in business. for Depreciable assets more widely defined. Claiming depreciation is mandatory; assumed on Claiming disposal of assets. disposal Allowable methods and rates all published by CIR. Depreciation calculations must be accurate to the month. Can elect not to depreciate particular assets. Can
25 25 Key Points - Leases
• Finance Lease = Specified Lease until 20 May 1999 • Operating Lease = Non-specified Lease until 20 May Operating • • •
1999 1999 Operating Lease: pure lease - rental expense & income Finance Lease: effectively a sale and purchase Finance agreement - deemed sale of asset and lease back. agreement Accounting for finance leases more complex - note Accounting choice of methods of allocation of interest and principal for specified leases continue for finance leases unless under accruals regime.
© Alistair Hodson Alistair 26 26 ...
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