Income Tax Act 2007

Timing and quantifying rules - Depreciation

EE 30: Economic rate for plant, equipment, or building, with high residual value

You could also call this:

"How the government works out depreciation rates for items that keep some value over time"

The Commissioner sets a rate for items that lose value over time. You need to know the item's cost and how long it will last. The Commissioner uses a formula to work out the rate. The formula uses the item's residual value, cost, and estimated useful life. You can find the definitions of residual value, cost, and estimated useful life in sections like section 91AAF of the Tax Administration Act 1994 and section EE 67. The Commissioner rounds the figure to the nearest rate and sets the same rate for similar items. The Commissioner follows a procedure to set the rate and issues a determination. You can find more information about the rates in schedule 11. The Commissioner thinks about the reduction in compliance costs when setting the rate. The item must be plant, equipment, or a building with a high residual value. The residual value is more than 13.5% of the cost. The item was acquired on or after a certain date, like 1 April 2005 for plant or equipment, or 19 May 2005 for buildings. The Commissioner calculates the rate using the formula: 1 − ((residual value ÷ cost) (1 ÷ estimated useful life)). The residual value is the greater of the estimated residual market value or 13.5% of the cost. The cost is the cost of the item, and the estimated useful life is defined in section EE 63. The Commissioner sets the rate from time to time by following the procedure and issuing a determination. The determination is issued under section 91AAF of the Tax Administration Act 1994. The rate is used to work out the depreciation of the item. You can find more information about the depreciation rates and how they are set. The Commissioner sets the rates to ensure that items are depreciated correctly. The rates are used to work out the tax that you need to pay. The formula is used to calculate the depreciation rate. The depreciation rate is used to work out the value of the item over time. The value of the item decreases over time as it depreciates. The Commissioner uses the formula to set the depreciation rate. The rate is set based on the item's residual value, cost, and estimated useful life. The Commissioner rounds the figure to the nearest rate and sets the same rate for similar items.

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Topics:

Money and consumer rights > Taxes

EE 29: Economic rate for certain aircraft and motor vehicles, or

"How certain aircraft and motor vehicles lose value for tax purposes"

EE 31: Annual rate for item acquired in person’s 1995–96 or later income year, or

"How to work out the annual rate for items you bought for your business after 1995"

Part ETiming and quantifying rules
Depreciation

EE 30Economic rate for plant, equipment, or building, with high residual value

This section is about setting the economic depreciation rate that applies to items of a kind of depreciable property if—
the kind of depreciable property is not fixed life intangible property, or excluded depreciable property, for which an economic rate cannot be set; and
the estimated residual market value for the item is more than 13.5% of cost; and
the items are—
1. plant or equipment acquired on or after 1 April 2005:
2. buildings acquired on or after 19 May 2005.

The Commissioner sets the rate from time to time by—
following the procedure set out in this section; and
issuing a determination under section 91AAF of the Tax Administration Act 1994.

To set the diminishing value rate for a kind of item of depreciable property, the Commissioner—
obtains a figure by applying the formula in subsection (4) to items of that kind; and
rounds the figure up or down to the nearest rate specified in schedule 11, column 1 (New banded rates of depreciation); and
sets the same rate for some or all of the kinds of items of depreciable property that are similar to one another, if the Commissioner thinks it is appropriate to do so having regard to—
1. the rate calculated for each kind; and
2. the reduction in compliance costs that is likely to be achieved.

The formula is—
$1 − ((residual value ÷ cost) (1 ÷ estimated useful life)).$

Where:
In the formula,—
residual value is the greater of—
1. estimated residual market value, which is defined in section EE 67:
2. 13.5% of cost:
cost is the cost of items of the kind to which the formula is applied:
estimated useful life is defined in section EE 63.

Compare

2004 No 35 s EE 25E

Notes

Section EE 30(1)(b): amended (with effect on 1 April 2008), on 6 October 2009, by section 118 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EE 30(3)(b): substituted (with effect on 1 April 2008), on 7 September 2010 (applying for the 2008–09 and later income years), by section 30(1) of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
Section EE 30 list of defined terms building: inserted (with effect on 30 July 2009), on 28 May 2010, by section 84 of the Taxation (Budget Measures) Act 2010 (2010 No 27).