Black and White paper, issue 4 (July 2010).

Reduction in company tax rates

The drop in the company tax rate from 30% to 28% applies from the beginning of the 2011/12 financial year. However, it should be noted that the new tax rate will be used in deferred tax calculations for 2010/11 and in some deferred tax calculations for 2009/10.

Deferred tax is the amount of income tax payable or recoverable in future periods and is calculated based on tax rates enacted or substantively enacted at balance date.

Entities with a March 2010 balance date should calculate the deferred tax balance at 30%, as the change in tax rates was enacted after balance date. However, the change in tax rates should be noted as a post-balance date event in the notes to the financial statements.

Entities with a June 2010 balance date should calculate the deferred tax balance using 28% for long-term temporary differences (for example, property, plant, and equipment) and 30% for short-term temporary differences (for example, holiday pay).

The deferred tax adjustment associated with the change in the tax rate should only be recognised in equity or other comprehensive income to the extent that it relates to balances shown in reserves. The remaining deferred tax adjustment should be recognised in tax expense, and should be disclosed as a separate item in components of tax expense and the tax note reconciliation.

Removal of tax depreciation on buildings

The removal of tax depreciation on buildings will significantly increase the deferred tax liability associated with certain buildings.

In general, deferred tax is calculated based on the difference between the carrying value of an asset and its tax base. The tax base of an asset is the amount that will be deductible for tax purposes.

As a result of the removal of tax depreciation on buildings, the tax base of existing buildings will be reduced to the tax depreciation deductions that can be claimed until the end of 2010/11. This will significantly increase the deferred tax liability associated with existing buildings. The increase in deferred tax will be charged to tax expense.

For new buildings, the initial recognition exemption will generally apply, and no deferred tax will be recognised on the difference between the accounting value and the tax base. In this case, deferred tax would not be recognised until the asset was revalued.

In general, there will be no change to the calculation of deferred tax on buildings intended for sale. There will also be no change to deferred tax on building fit-out, as these assets will continue to be depreciable for tax purposes.

Entities with a March 2010 balance date should not recognise the increase in deferred tax on buildings, as the change in law was enacted after balance date. However, the removal of tax depreciation on buildings and its effect on deferred tax should be mentioned in the note to the financial statements regarding significant events after balance date. Entities with June 2010 balance dates will need to recognise the increase in deferred tax on buildings.

Contact

Contact Jason Biggins, Tax Director, on 021 222 4001 or jason.biggins@auditnz.govt.nz if you have any specific queries.

Page last updated: 26 November 2010