COVID-19 has had a massive impact worldwide and the New Zealand government has responded by making a number of short-term changes to the income tax rules to encourage growth in the economy. One of the changes is a temporary increase in the low-value asset threshold from $500 to $5,000 through to 16 March 2021, with a permanent change to $1,000 from 17 March 2021.
The increase in threshold will see a tax deduction allowed for the full value of asset purchases of $5,000 or less. This is a huge benefit if capital purchases are required in the coming year. Previously purchases over $500 had to be capitalised, and if depreciable, expensed over the life of the asset. In the case of non-depreciable items, such as building improvements to a residential rental property, no tax deduction was allowed.
Owners of residential rental properties that are looking to undertake improvements to bring their properties in line with the Healthy Homes Standards can particularly benefit from this change. The Healthy Homes Standards will apply progressively with changes in tenancies, with the rules fully in place from 1 July 2024. Details of the new Healthy Homes legislation can be accessed here.
The purchase of items to meet the new Healthy Homes Standards, such as installation of new insulation, ducted or multi-unit heat pumps, new or replacement opening windows, extractor fans etc. that cost $5,000 or less are now able to be fully expensed if paid for on or before 16 March 2021. Prior to 17 March 2020, no deduction was allowed for the cost of these items unless the item cost $500 or less.
There is a window of opportunity that residential rental property landlords need to take advantage of. Bring forward your Healthy Home improvements to ensure you receive a full tax deduction. Don’t leave the improvements until after 16 March 2021 when the threshold drops down to $1,000.
If you have questions on the changes to the low-value asset rules, or how best to a structure capital purchase, please contact your Hayes Knight advisor.