Depreciation is defined as a non-cash, tax deductible allowance that recognises that an asset loses value over time. Depreciation can be deducted from your annual income to reduce your taxable earnings.

Depreciation should be claimed on fixed assets used in your business that have a useful lifespan of more than one year. There are two methods for calculating the amount to claim - diminishing value or straight line method:

Diminishing value depreciation

Depreciation is calculated on the adjusted tax value of the asset. This adjusted value is the original cost less depreciation already claimed. For example, a vehicle with a depreciation rate of 30% diminishing value. The cost (excluding GST) was $40,000.

Straight line depreciation

Depreciation is calculated on the original cost price of the asset, and the same amount is claimed each year. For example, if the car in the example above is depreciated using the straight line method, with a rate of 21%. The GST- exclusive cost is $40,000, so the depreciation to claim each year is:

$40,000 x 21% = $8,400

Depreciation rates for various assets are available on the IRD website and to work out the amount of depreciation you could claim on a particular asset use the IRD depreciation calculator.

Depreciation rates for various assets are set by Inland Revenue, and are based on the cost and the useful life of the asset. This means that assets that last longer have relatively low depreciation rates.

You can only claim depreciation for the months that you own an asset and you can only claim the proportion of depreciation that relates to the business use of the asset (if it is shared between business and private use).

Only fixed assets which lose value over time can be depreciated. Hence, land, which generally does not lose its value over time, cannot be depreciated.

To claim depreciation you will have to keep a fixed asset register to show the assets you are depreciating.

Fixed Asset Register

An asset is something that the business owns. A fixed asset is an asset that you expect to use in your business for more than a year. In order to comply with IRD regulations, as well as for your own internal controls, you should keep a record of your fixed assets. This proof should be from the purchase to the sale of any fixed asset, and includes tax invoices. Using a fixed asset register is a good way to keep track of these assets.

Examples of fixed assets are: computers, phone systems or office furniture. Your fixed asset register should include asset description, identifier, purchase date, cost, depreciation and current value (excluding GST).

You may wish to create your own Fixed Asset Register if your accountant has not created one for you, using the downloadable fixed asset register.

Depreciation Changes

The following changes have been made to the depreciation rules in recent years:

1. Low value assets

The immediate deduction allowed for low value assets increased from $200 to $500 for assets acquired after 19 May 2005. This reduces compliance costs. These low value items are written off for tax purposes in the year of purchase. However, they may still be retained on an asset register for control purposes.

2. Revision of rates

As part of the Budget 2010 changes were made to the depreciation rates for new asset purchases. The previously allowed 20% depreciation loading for the purchaser of new assets no longer applies for assets purchased after the 21^st May 2010. Also, from the 2011-12 income year, the depreciation rate for buildings with an estimated life of more than 50 years will be zero.