The Financial Reporting implications of deferred tax on buildings

9 April 2020

On 26 March 2020, legislation was enacted which restored tax depreciation deductions for commercial buildings. Such depreciation was previously removed from the 2011–12 income year. The amendment will allow tax depreciation to be claimed for the 2021 income year onwards.

As the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act has received Royal Assent, the changes will need to be reflected in financial statements with reporting dates on or after 31 March 2020.

This article provides high level guidance on how the changes impact deferred tax balances for entities who report under the New Zealand equivalents of International Financial Reporting Standards (NZ IFRS). More specifically, how the provisions of NZ IAS 12 Income Taxes apply.

Deferred tax implications

The reinstatement of tax depreciation will increase the tax base of applicable assets with a corresponding reduction in deferred tax liabilities or an increase in deferred tax assets.

How the change impacts any deferred tax balances depends on the date on which applicable buildings were acquired, and whether they are held through use under NZ IAS 16, or classified as available for sale (e.g investment properties). The most significant impact will be for buildings held for use.

Buildings Acquired Prior to May 2010

For buildings acquired prior to May 2010, there will be a deferred tax liability on the balance sheet due to the temporary difference between the carrying amount of the buildings and the tax base which was zero.

With the reinstatement of tax depreciation, the tax base of the building will be the remaining balance of undepreciated costs (plus any subsequent capitalised costs), therefore altering the temporary difference.

The result will be a change in the deferred tax liability. In some cases, the deferred tax liability may be completely de-recognised and new deferred tax asset brought on to the balance sheet (subject to deferred tax asset recognition criteria in NZ IAS 12). The impact of this change is recognised in tax expense.

Buildings Acquired Subsequent to May 2010

For buildings acquired subsequent to May 2010, the initial recognition exemption would have applied and no deferred tax would have been recognised at the time of acquisition.

With the reinstatement of tax depreciation, tax depreciation will now be able to be claimed on such buildings. Therefore, there will be a temporary difference which we consider should be recognised on the net difference between the carrying amount of the building and the and the tax base (i.e the future deductible amount). Again the impact of this change is recognised in tax expense.

Buildings Held for Sale

For buildings that are held for sale, such as investment properties, the tax consequences of sale results in tax payable on tax depreciation recovered as there is no capital gains tax in New Zealand. Therefore, it is appropriate to recognise deferred tax on the tax depreciation that would be recovered on sale.

For buildings acquired prior to May 2010, there is most likely already a deferred tax liability. This liability will increase as further tax deprecation is claimed.

For buildings acquired after May 2010, a deferred tax liability will be recognised as tax depreciation is claimed.

This is assuming that the buildings in question have a carrying value greater than cost.

Deferred Tax Assets

Any deferred tax asset that arises as a result of the change in this tax treatment will need to be able to satisfy the recognition criteria in NZ IAS 12, that is, it is only able to be recognised to the extent it is probable the future taxable profit will be available against which the deductible temporary difference can be utilised.

Other

These changes will also apply to those entities applying PBE Accounting Standards, as the requirements of PBE IAS 12 Income Taxes are substantially similar to NZ IAS 12.

If you require any further assistance or have a specific question, please contact your Findex adviser.

Examples

Building Acquired Prior to May 2010

A building was acquired by Company Y for $100,000 at the start of the 2010 year. The building is classified as property, plant and equipment a carried at cost less accumulated depreciation.

For accounting purposes, it is carried at cost less accumulated depreciation and impairments losses. It is depreciated over its useful life of 100 years.

For tax purposes it was eligible for tax deprecation at 2% for the 2010 year, however, this was removed in May 2010. Tax depreciation is restored for the 2021 year, the legislation to do so was substantially enacted at 31 March 2020.

Date

Carrying amount

Tax base

Temporary difference

Tax rate

Deferred tax Dr/(Cr)

31 March 2010

99,000

98,000

(1,000)

28%

(280)

31 March 2011

98,000

-

(98,000)

28%

(27,440)

31 March 2019

90,000

-

(90,000)

28%

(25,200)

31 March 2020

89,000

98,000

9,000

28%

2,520*

* The following journal entry will be required to reflect the change in the deferred tax balance :

Dr Deferred tax 27,720

Cr Tax expense 27,720

Building Acquired Subsequent to May 2010

A building was acquired by Company X for $100,000 at the start of the 2012 year. The building is classified as property, plant and equipment carried at cost less accumulated depreciation.

For accounting purposes, it is carried at cost less accumulated depreciation and impairments losses. It is depreciated over its useful life of 100 years.

A deferred tax liability was not recognised at the time of acquisition as it arose from the initial recognition of an asset in a transaction that was not a business combination.

For tax purposes, tax depreciation is available for the 2021 year at a deprecation rate of 2%, the legislation to do so was substantially enacted at 31 March 2020.

Date

Carrying amount

Tax base

Temporary difference

Tax rate

Deferred tax Dr/(Cr)

31 March 2012

99,000

-

(99,000)

Initial recognition exemption applies

Initial recognition exemption applies

31 March 2020

91,000

100,000

9,000

28%

2,520

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Disclaimer:

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex NZ Limited.

April 2020

This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.

While all reasonable care is taken in the preparation of the material in this document, to the extent allowed by legislation Findex accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex assumes no obligation to update this material after it has been issued.

The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. You should seek professional advice before acting on any material.

March 2020

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