The Canterbury earthquake and its aftershocks have resulted in the destruction of buildings, plant, and equipment. This has given rise to a number of depreciation issues:
One issue is the cashflow constraints of depreciation recovery income when the insurance proceeds exceed the tax book value of the destroyed asset. The Government has proposed relief for those affected (legislation to be effective 4 September 2010). The proposed relief is:
- Rollover relief will be allowed on depreciation recovered arising from insurance proceeds in respect of the Canterbury earthquake and its aftershocks;
- The election is on a class basis, with two classes identified, being buildings together with fit-out and “other” (i.e. plant and equipment);
- The fixed asset must be replaced by new or second-hand assets (the rollover assets) in the same class by the end of the taxpayer’s 2015-16 income year; and
- If the insured fixed asset was a building, the replacement building must be located inside an area covered by the Christchurch, Selwyn, and Waimakariri District Councils.
How it affects you
The amount of rollover relief available depends on the degree to which assets are replaced. This is to be determined by comparing the cost of the destroyed assets with the cost of the replacement assets. You must make and election to use rollover relief in writing. There are rules for how and when this must be done.
You (the owner) must also advise in writing with your income tax return, when the replacement asset(s) have been acquired and details of the deferred depreciation recovery offset into your adjusted tax value.
If you do not replace the destroyed asset, then to the extent that deferred depreciation recovered has arisen, it is brought to account as income at the earlier of:
• Your 2015-16 income year;
• The income year in which you made a decision not to replace the destroyed asset; or
• Any year in which you go into liquidation or bankruptcy.
If you are in any doubt as to how the relief applies to you, contact your tax advisor.