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Income Tax Act 2007

Recharacterisation of certain transactions - Tax relief for emergencies - Replacements: depreciable property

FP 10: Replacement reduction for affected depreciable property

You could also call this:

“Reducing tax when you replace something that's worn out”

When you replace something that can be depreciated, you need to work out the replacement reduction. This is used for the purposes of sections FP 9 and FP 11. You do this by following some rules.

If you get a new item to replace something and you do not use the pool method, the replacement reduction is either zero or calculated using a formula. The formula uses some special terms like limited replacement cost, class excess recovery, and affected class cost. These terms help you work out the right amount.

If you use the pool method, the replacement reduction is the lesser of the replacement cost or the amount of suspended recovery income. You need to choose the order in which you got the new items if you got them at the same time. You do this in your first tax return after you got the new items.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS1432187.

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"What 'suspended recovery income' means for a group of similar assets"

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FP 11: Effect of replacing affected depreciable property on subpart EE, or

"What happens to tax when you replace something that can be depreciated, like a machine"

Part F Recharacterisation of certain transactions
Tax relief for emergencies: Replacements: depreciable property

FP 10Replacement reduction for affected depreciable property

  1. This section applies for the purposes of sections FP 9 and FP 11 to determine the amount of the replacement reduction when affected depreciable property is replaced.

  2. If the person acquires an item of replacement property and links it with an affected class of affected depreciable property for which the person does not use the pool method, the amount of the replacement reduction is—

  3. zero, if the cost of the affected class is equal to or less than the person’s total replacement costs in acquiring, before that item, other replacement property linked with the affected class; or
    1. in any other case, calculated using the formula—

      1. In the formula in subsection (2),—

      2. limited replacement cost is the lesser of—
        1. the amount by which the cost of the affected class exceeds the total replacement costs in acquiring, before the item of replacement property, other replacement property linked with the affected class; and
          1. the replacement cost of that item:
          2. class excess recovery is the amount by which the affected depreciation recovery income for an affected class exceeds the affected depreciation loss for that class:
            1. affected class cost is the total cost for the person of the affected class.

              1. If the person acquires an item of replacement property and links it with an affected class of affected depreciable property for which the person uses the pool method, the amount of the replacement reduction is the lesser of—

              2. the replacement cost of the item; and
                1. the amount of suspended recovery income that remains for the class of affected property after the acquisition of other replacement property but before the acquisition of the item of replacement property.

                  1. If items of replacement property are acquired at the same time and the effect of this section depends on the order in which the items are acquired, the items are treated as being acquired in the order chosen by the person in their first return of income in which the acquisition is taken into account.

                  Notes
                  • Section FP 10: inserted, on , by section 65 of the Taxation (Annual Rates for 2024–25, Emergency Response, and Remedial Measures) Act 2025 (2025 No 9).