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Determination A8: Tax adjustments for depreciation loss and depreciation recovery income under AIM

Scope

  1. Under the Accounting Income Method (AIM), taxpayers can calculate their provisional tax payments by using accounting software if that software is in accordance with determinations made under section 91AAX of the Tax Administration Act 1994.

  2. An AIM-capable accounting system calculates provisional tax using year-to-date accounting income and expenditure adjusted for tax purposes (if required). The purpose of this determination is to detail the tax adjustment for depreciation loss and depreciation recovery income to calculate year-to-date net positive accounting income and expenditure, after tax adjustments, for an AIM instalment period.

  3. It provides that, for tax adjustment purposes, accounting income and expenditure must not include any depreciation- or amortisation-related amounts unless a person chooses to use the relevant provisions in the Income Tax Act 2007.

  4. Subpart EE of the Income Tax Act 2007 quantifies the amount of depreciation recovery income that is income under Part C of the Income Tax Act 2007 and quantifies the amount of depreciation loss a person is allowed as a deduction where the provisions of Part D of the Income Tax Act 2007 are satisfied.

  5. Where a person chooses to use tax depreciation, this determination provides an appropriate tax adjustment, consistent with subpart EE of the Income Tax Act 2007, for—
     
    1. accounting income, commensurate with the amount of depreciation recovery income arising under Part C of the Income Tax Act 2007:

    2. accounting expenditure, commensurate with the amount of depreciation loss arising under Part D of the Income Tax Act 2007.

  6. If a person chooses to not use tax depreciation, this determination provides a tax adjustment such that accounting income and expenditure does not include any depreciation- or amortisation-related amounts.

Application

This determination applies for the 2018-19 and later income years.

Tax adjustments: no depreciation or choose tax depreciation

  1. This clause requires tax adjustments to the extent to which a person’s accounting income and expenditure does not already accord with the adjustments described in this clause.

  2. A person must choose, for an income year, to either—
     
    1. not account for any depreciation- or amortisation-related income and expenditure in relation to any of their depreciable property; or

    2. account for depreciation- and amortisation-related income and expenditure in relation to all of their depreciable property using, for each instalment period in the income year, the amounts of depreciation recovery income and depreciation loss calculated, for the relevant period, under the Income Tax Act 2007.

  3. If a person uses the choice in subclause (2)(b), the amount of depreciation loss is limited to the amount calculated on a year-to-date basis.

  4. For an instalment period in the income year, tax adjustments to accounting income and expenditure must be made to account for their choice.

Example 1:

Sharon uses an AIM-capable accounting system to calculate her provisional tax.

The accounting software which Sharon uses calculates depreciation recovery income and depreciation loss consistent with subpart EE of the Income Tax Act 2007.

For the AIM instalment period December/January 2019, Sharon’s accounting software has calculated a depreciation loss of $2,000 for the 2 months year-to-date.

In these circumstances clause 3 of this determination will allow the depreciation loss of $2,000 as accounting expenditure in the December/January 2019 AIM-instalment period.

Example 2:

Keith uses an AIM-capable accounting system to calculate his provisional tax.

He chooses to account for depreciation and amortisation related income and expenditure under clause 3(2)(b).

He has one asset in his business. The opening tax book value of the asset in his AIM-capable software at the beginning of the year is $3,200 and he uses the diminishing value method of depreciation.

The diminishing value rate of depreciation for the asset is 50%. Under clause 3(3), Keith is only permitted a deduction for the depreciation calculation year-to-date. His current AIM instalment period is his second 2-month period for the income year. Thus, the year-to-date amount is for 4 months.

Keith’s software automatically calculates the depreciation charge for the year (being 50% of $3,200) as $1,600 and apportions that charge for the 4 months year-to-date.

Keith has expenditure of $533.33 for depreciation for the year-to-date. This automatically feeds into his accounting income and expenditure from his fixed asset register so no separate tax adjustment is required.

Tax adjustments: manual and automatic

A tax adjustment under this determination must be made by—

  1. the user of the accounting software, manually:
  2. the accounting software, automatically:
  3. any other means, as appropriate.

Tax adjustments: errors and oversights in previous instalment period

An error or oversight affecting accounting income or expenditure (including income or expenditure adjusted by a determination) for an instalment period in an income year must be corrected by making a tax adjustment in the next instalment period after the one in which the error or oversight is identified.

Interpretation

  1. In this determination, unless the context otherwise requires,—

    instalment period, for a person, means the 2-monthly or monthly period given by schedule 3, part AB of the Income Tax Act 2007 for the applicable instalment date:
     
  2. Any word or term that is defined in the Income Tax Act 2007 and the Tax Administration Act 1994 and used, but not defined, in this determination has the same meaning as in those Acts.

  3. Examples used in this determination are included in this determination only as interpretational aids. If there is conflict between an interpretational aid and a provision of this determination, the provision prevails.

This determination is made by me, acting under delegated authority from the Commissioner of Inland Revenue under section 7 of the Tax Administration Act 1994.

This determination is signed on the 10th day of October 2017.

Keith Taylor

Manager, PAS