myIR, payments and more
The Government has introduced relief provisions for "depreciation recovery income" from insurance and compensation payments resulting from the earthquakes in the Hurunui, Kaikoura and Wellington areas (the Kaikoura earthquake).
This covers any earthquake that occurs in, or significantly affects, the earthquake-affected areas on or after 14 November 2016.
In most circumstances, when you dispose of a depreciable asset, if the disposal amount on that asset is more than the adjusted tax value (book value) of the asset the excess (depreciation recovered) is generally treated as income for tax purposes.
The earthquake relief provisions mean you can delay including the excess as income in your tax returns, when insurance or compensation payments are more than the book value of the affected asset(s).
Affected assets must be in an earthquake-affected area
Earthquake-affected areas are:
- the districts or regions of the Hurunui Kaikoura area:
- Canterbury Regional Council
- Hurunui District Council
- Kaikoura District Council
- Marlborough District Council
- the districts or regions of the Wellington area:
- Wellington City Council
- Hutt City Council
- Wellington Regional Council
- parts of the coastal marine area (within the meaning of section 2(1) of the Resource Management Act 1991) that are part of, or next to, the above districts and regions, and
- the areas of other districts or regions that contain transport or other infrastructure.
When the relief provisions apply
You can elect to be covered by the relief provisions if you meet the following conditions before the beginning of your 2019-20 income year:
- You receive insurance or compensation for affected assets damaged in the earthquake-affected areas that are one of the following classes:
- plant and equipment
- commercial fit-out
- pool-method property/assets
- a building or grandparented structure you can't use any longer to earn an income from, and is demolished or abandoned for later demolition
- assets that have been assessed by the insurer as uneconomic to repair.
- You would have an amount of depreciation recovered due to insurance or compensation received for affected assets.
- You plan to buy replacement property that is:
- physical depreciable property
- bought in or before the end of your 2019-2020 income year, and:
- included in the same class of property if the old property was a building or a grandparented structure,or
- fit-out (not depreciated under the pool method), and
- located in an earthquake-affected area (unless the replacement item is plant and equipment).
Applying for the relief provisions
You need to provide written notice of election to use the relief provision to the Commissioner by the later of :
- 31 January 2018, or
- the date that the return of income is filed for the income year in which the amount of depreciation recovery income can be reasonably estimated.
What happens if you meet the conditions for relief provisions
If you meet the above conditions, payments, you get that would result in depreciation recovery income, become suspended recovery income. The suspended income is allocated to reduce the cost prices for depreciation purposes when the replacement item is acquired.
Any unallocated suspended recovery income must be attributed to the earlier of:
- the end of the 2020-21 income year, where suspended recovery income remains unallocated,or
- the income year that you decide not to acquire replacement property. The amount you don't spend is depreciation recovery income in that year, or
- the income year you go into liquidation or bankruptcy.
Where insurance or compensation payments cover more than one item of property:
- calculate the suspended recovery income for each item and
- match it to the replacement asset plan.
Assets included in a pool can be grouped under a class of assets for the purposes of buying a replacement item. Specific rules give some flexibility in case the asset can't be bought.
Plant and equipment (not previously depreciated under the pool method) destroyed by the Kaikoura earthquake had a cost of $1 million. On the day of the earthquake the plant and equipment had a book value of $700,000. The owner gets a $1 million insurance payment. The net depreciation recovered is, $300,000.
Damaged depreciable property that is uneconomic to repair
When damage to assets happens from multiple earthquakes and aftershocks, you can use the date of the final damage as the date the asset is written off, and then put to another use.
So that post-earthquake repairs are correctly capitalised (and not treated as a revenue expense), the asset is treated as being reacquired on the same date as the write-off for nil consideration.
Under the provision applying to the Kaikoura events, for an asset to be written off and put to another use:
- The depreciable asset must be damaged by a Kaikoura earthquake
- The owner of the asset must be entitled to an amount of insurance or compensation for the damage to the item
- The asset has been assessed by the insurer as uneconomic to repair
- The damage has not caused the asset to be damaged beyond repair or unable to be used to earn income
Working out your depreciation recovery income
Once you can estimate or know how much the insurance and compensation payments are, you can work out the amount of depreciation recovery income.
If you want to suspend an amount of income you must let the Commissioner know in writing for each year covering the period of the depreciation recovery income. Your notice should include:
- a description of the affected property
- which class the affected property is in
- separating pool assets from non-pool assets
- a description of the replacement property you bought in the current year and the class of the affected property the replacement is in
- the cost of the replacement item minus the depreciation recovery income you got for that item, and
- how much of the recovery income you've still got at the end of the income year in each class.
You must elect each year to suspend returning the income. Even if you don't acquire any replacement assets in an income year, you must still notify us that you are electing to suspend the income.
We don't need a notice for the income year after you've completed your return for the 2019–20 income year as there is no deferral for the 2020-21 income year.
In November 2016, a firm's building is destroyed in the Kaikoura earthquakes. The firm has a 31 March balance date.