Katherine Rich on New Zealand's residential aged care challenges
https://youtu.be/b0oiI7QO8y4
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"A new report on New Zealand’s retirement village and aged care sector says NZ needs an extra 61,121 retirement village units within the next 10 years"
https://businessdesk.co.nz/article/p...9bb4-446239310
It seems both National and Labour are intent on removing depreciation as a deduction for commercial and industrial buildings, from 1 April 2024.
Does this regime apply to retirement village complexes/aged care facilities? Or are they in another category/different tax situation so far as deducting depreciation is concerned. I presume their Financial Statements will still be prepared recognising depreciation on both buildings and chattels (the latter I imagine obviously still deductible) but can the depreciation charge on buildings still be offset against profits, for tax purposes?
Answer is clearly relevant for all operators. Apologies for being too lazy to try to get my head around the Income Tax Act 2007 as amended currently, as it just seems easier to post.
Oceania claimed around $11m of depreciation on buildings in the last fy. Presumably this deduction won't be allowed in future.
But shouldn't make much difference to the cashflow since OCA doesn't appear to pay any net tax anyway, and will probably continue not to pay tax for the next few years at least.
ronaldson, this 'interpretive document' published by the IRD (IS22/04) looks to provide your answer:
https://www.taxtechnical.ird.govt.nz...20220719225111
Buildings are defined as 'residential' or 'non-residential'. The tax definition of the latter is that it is 'not the former'. So it is worthwhile considering just what a residential building is, for tax purposes.
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From p11
residential building—
(a) means a dwelling; and
(b) includes a building intended to ordinarily provide accommodation for periods of less than 28 days at a time, if the building, together with other buildings on the same land, has less than 4 units for separate accommodation
A 'dwelling' is further defined as "any place configured as a residence or abode, whether or not it is used as a place of residence or abode, including any appurtenances (e.g. garages or sheds) belonging to or enjoyed with the place."
but specifically NOT including:
"a rest home or retirement village, EXCEPT to the extent that, in relation to a relevant place, it is, or can reasonably be foreseen to be, occupied as a person’s principal place of residence for independent living."
This is further clarified on p13:
"Buildings within rest homes and retirement villages will generally be non-residential buildings. This is because they are excluded from the definition of “dwelling”. However, places within a rest home or retirement village occupied under independent living arrangements are not excluded from the definition of dwelling and therefore may be a residential building. "
"Independent living is defined in as occupancy of a place under an arrangement that—
(a) does not have a level of compulsory care:
(b) has a level of compulsory care that is merely incidental to the occupancy"
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So it looks to me as though this proposed 'setting the depreciation rate to zero' for commercial buildings, will result in no depreciation being able to be claimed against taxable income for the 'rest home' part of the retirement village business. Such a law change will not directly effect the depreciation rates of and associated 'independent living units', because these units, being 'dwellings', are not allowed to be depreciated with the law as it stands currently (i.e. their depreciation rate is already zero).
SNOOPY
Thanks, Snoopy. Clarifications/the interpretive document are often confusing.
As I have it - since the covid relief package introduced in 2020 rest homes/retirement village operators will have charged depreciation on non-residential buildings (care centers, clubhouse/amenity buildings and the like, but not villas, independent living apartments and so on) so we would need to look at each operator's most recent set of Financial Statements to determine the impact on that entity of the Government in due course reducing the depreciation rate (for buildings, not chattels, plant and equipment) to 0%.
Of course, under accounting rules depreciation (which is a non- cash expense) on buildings will still be applied/recorded/shown, just not allowed as a deduction against taxable profit?
Going back to the National Party press release, commenting on the 'money saved': https://www.national.org.nz/boosting...esponsible_way
"$525 million on average per year from ending the commercial building depreciation tax break."
There is no distinction in that quotation made between buildings with a life of over 50 years or under 50 years. I may have this wrong. But IIRC when depreciation was first removed as a deduction in the FY2011/2012 financial year, this was only for buildings with an expected life of more than 50 years. If the building life was <50years, then you were able to go on depreciating it, as previously allowed.
I notice looking at the Oceania Annual Report for FY2023 on p53, 'Freehold Buildings' are listed as having a life range of 10-50 years. So does that mean such a pending depreciation rule change will have no effect on the likes of Oceania? IOW, no commercial building with a life of 50 years or more in your property portfolio means no change? Or is National planning to scrap all commercial building depreciation? I am unclear on this matter.
If none of these retirement village buildings have a commercial life of more than 50 years, and 'IRD allowable depreciation' on these buildings is reduced to 0%, that doesn't mean those buildings will not have to be replaced eventually. So I suspect you are correct ronaldson. There would have to be two sets of accounts. One with 0% depreciation as required by the IRD. The second set of accounts would be kept by management where depreciation is still booked so that management have a picture of how much capital value is being lost via real depreciation that is not recognized by the IRD. The second set of accounts would be the one presented to shareholders. I.e. depreciation is still reported on, but is disallowed as a business expense.
SNOOPY
Keeping on topic, provided those retirement village operators who have expanded into Australia have an imputation credit account in Australia, they will not come under the FIF regime.
To address your question more generally, FIF is just part of income tax. FIF is calculated and incorporated within the income tax liability. The 'fact' there is not necessarily any cashflow backing the FIF income is 'just that'.
SNOOPY