How does this work in practice?
For many taxpayers, their first immediate thought when acquiring a new asset might be: “Can I immediately expense it?” (i.e. does it fall under the $1,000 low-value asset threshold?). However, if the item forms part of any other item that is depreciable property, it is not eligible for an immediate write-off, even if it is below the low-value threshold, as it would be considered an improvement. Instead, the item of property should be considered an addition to the existing depreciable property and depreciated in line with the rate used for the existing depreciable property.
An example in the guidance suggests that a desktop computer package consisting of a computer, a wireless keyboard and mouse are one item of depreciable property for tax depreciation purposes.
Inland Revenue’s rationale behind this outcome is that the keyboard and mouse have no practical purpose or use without the computer and are intended to function as a single integrated system. This is the case despite the computer, keyboard and mouse all performing a separate function of their own. The conclusion reached is that the three items serve no practical purpose without the other components and cannot be considered to satisfy a particular notion by themselves. As such, they comprise one single item of property (the computer).
This has minimal implications on the amount of tax depreciation that will be claimed as the depreciation rate for the three components is the same in most situations. However, there are practical considerations when, for example, a business purchases a keyboard for $150. Given this keyboard forms part of another item that is depreciable property (the computer), the keyboard would be depreciated rather than being written off as a low-value asset.
This highlights the importance of correctly identifying an item of property at acquisition.
In contrast, the example distinguishes between the purchase of a printer and that of a keyboard and mouse. The guidance argues that a printer is a separate item as the computer can function without the printer and that the printer provides a separate function of printing, copying and scanning.
While the above examples might be relatively clear-cut, what if a keyboard was purchased to accompany a touchscreen tablet? A tablet with a touchscreen can ordinarily be used without a keyboard. Would your analysis change in this circumstance? The draft guidance also states that an additional screen or an ergonomic mouse would also form part of the computer. This example illustrates some of the practical difficulties taxpayers will face in determining where an asset starts and stops.
As with the capital/revenue distinction, the analysis of identifying the relevant item or property can operate in a grey area where the answer is often not clear-cut. Given this complexity, we would recommend reaching out to your Deloitte tax adviser if you are unsure the next time you purchase a new item of property.
Application to existing published guidance
For completeness, where the Commissioner has already published specific guidance, that guidance should be referred to instead of the guidance for identifying the relevant item of property. This guidance includes:
- Dairy farming – deductibility of certain expenditure (IS0025).
- Can owners of existing residential rental properties claim deductions for costs incurred to meet Healthy Homes standards (QB 20/01)?
- Residential rental properties – depreciation of items of depreciable property (IS 10/01).
- Claiming depreciation on buildings (IS 22/04).
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