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EE 36: Using economic rate or provisional rate instead of special rate
or “When you can use different rates to calculate item depreciation”
You could also call this:

“How to handle tax for improvements to depreciable assets”

When you make an improvement to something you own that can be depreciated, there are special rules about how to handle it for tax purposes.

In the year you make the improvement, you treat it as if it were a separate item. This applies from the start of the month you first use it or have it ready to use, until the end of that tax year.

For the following years, you have some choices. If you use the diminishing value method or the straight-line method, you can either:

  1. Keep treating the improvement as a separate item, or
  2. Treat it as part of the original item you improved.

However, if the item you improved is a grandparented structure, you must keep treating the improvement as a separate item.

If you use the pool method, you must treat the improvement as a separate item. If its cost is not too high, you need to add it to a pool in the first year after you made the improvement when you use it or have it ready to use.

When you add an improvement to a pool, you increase the pool’s value by the improvement’s value. You also include the improvement’s value from the end of the previous year in the starting value for the calculations in section EE 21(5).

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Next up: EE 38: Items of low value

or “Tax deductions for low-cost business items”
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Part E Timing and quantifying rules
Depreciation

EE 37Improvements

  1. This section applies when a person makes an improvement to an item of depreciable property.

  2. In the income year in which the person makes the improvement, the provisions of this subpart apply to the improvement, as if it were a separate item of depreciable property, in the period that—

  3. starts at the start of the month in which the person first uses the improvement or has it available for use; and
    1. ends at the end of the income year.

      1. For income years following the income year in which the person makes the improvement,—

      2. a person who uses the diminishing value method or the straight-line method for the item that was improved may choose to apply subsection (4) or (5) unless the item is a grandparented structure, in which case the person must continue to treat the improvement as a separate item of depreciable property:
          1. a person who uses the pool method for the item that was improved must apply subsections (6) and (7).

            1. Repealed

            2. For the purposes of subsection (3)(a), a person may choose to treat the improvement as a separate item of depreciable property.

            3. For the purposes of subsection (3)(a), a person may choose to treat the improvement as part of the item of depreciable property that was improved. They must do 1 of the following for the first income year, after the income year in which they made the improvement, in which they use the improvement or have it available for use:

            4. if they use the diminishing value method for the item, add the improvement’s adjusted tax value at the start of the income year to the item’s adjusted tax value at the start of the income year:
              1. if they use the straight-line method for the item,—
                1. add the improvement’s adjusted tax value at the start of the income year to the item’s adjusted tax value at the start of the income year; and
                  1. add the improvement’s cost to the item’s cost.

                  2. For the purposes of subsection (3)(b), a person who uses the pool method for the item that was improved must treat the improvement as a separate item of depreciable property. If its cost is equal to or less than its maximum pooling value, they must include it in a pool in the first income year, after the income year in which they made the improvement, in which they use the improvement or have it available for use.

                  3. When an improvement is included in a pool under subsection (6),—

                  4. the pool’s adjusted tax value is increased by the improvement’s adjusted tax value on the date it is included in the pool; and
                    1. the improvement’s adjusted tax value at the end of the previous income year is included in starting adjusted tax value in section EE 21(5).

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                      Notes
                      • Section EE 37(3)(a): replaced, on , by section 7(1) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                      • Section EE 37(3)(a): amended (with effect on 1 April 2020), on , by section 57(1) (and see section 57(3) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                      • Section EE 37(3)(ab): repealed, on , by section 7(1) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                      • Section EE 37(3B) heading: repealed, on , pursuant to section 7(2) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                      • Section EE 37(3B): repealed, on , by section 7(2) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                      • Section EE 37 list of defined terms building: inserted (with effect on 30 July 2009), on , by section 84 of the Taxation (Budget Measures) Act 2010 (2010 No 27).
                      • Section EE 37 list of defined terms grandparented structure: inserted (with effect on 1 April 2020), on , by section 57(2) (and see section 57(3) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                      • Section EE 37 list of defined terms grandparented structure: repealed, on , by section 7(3) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                      • Section EE 37 list of defined terms international aircraft: repealed, on , by section 7(3) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                      • Section EE 37 list of defined terms New Zealand: repealed, on , by section 7(3) (and see section 7(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).