What is Depreciation (New Zealand Tax)?

New Zealand's tax depreciation system is governed by the Income Tax Act 2007 and the general depreciation rates published by IRD in IR265. When a business purchases an asset with a useful life extending beyond the current tax year, the cost is not deducted immediately (except for low-value assets) but instead spread over the asset's estimated useful life at prescribed rates.

**Diminishing Value vs Straight-Line** Under the diminishing value (DV) method, the same percentage applies each year to the remaining book value (tax written-down value). This front-loads deductions, resulting in larger deductions in early years. Under the straight-line (SL) method, the same dollar amount is deducted each year, spreading the cost evenly. For most assets, the DV rate is approximately 1.5 times the SL rate, so they result in the same total deduction over the asset's life but with different timing. Most businesses prefer DV for the cash flow benefit of earlier deductions.

**Low-Value Asset Threshold** Assets costing NZD 1,000 (GST-exclusive) or less can be fully deducted in the year of purchase, regardless of their actual useful life. This simplifies bookkeeping for small items. However, where multiple identical items are purchased in the same tax year and individually cost less than NZD 1,000 but collectively exceed it, IRD may require capitalisation.

**Buildings at 0%** Since the 2011-12 income year, buildings with an estimated useful life of 50 years or more are depreciated at 0% for tax purposes. This applies to virtually all commercial and residential buildings. Prior to 2011, buildings were depreciated at rates between 1% and 3% SL. The 0% rate creates a permanent difference between accounting depreciation and tax depreciation for property-holding businesses. If a building is sold above its tax book value (which equals cost since no depreciation has been claimed), there is no depreciation recovery.

**Depreciation Recovery (Depreciation Clawback)** When a depreciable asset is sold for more than its tax book value (cost less depreciation claimed), the gain up to original cost is treated as taxable income (depreciation recovery). This prevents businesses from claiming depreciation deductions and then selling assets without paying tax on the recovery. The recovery amount is included in ordinary income in the year of sale, not as a capital gain.

**Timing Differences and IR4 Adjustment** Because accounting depreciation (using GAAP rates and useful lives) differs from tax depreciation (using IRD rates), most companies have a timing difference to adjust on the IR4. The adjustment adds back accounting depreciation and deducts the IRD-calculated tax depreciation, resulting in a different taxable income from accounting profit.