In the majority of circumstances it is worthwhile having a chattel valuation completed for tax purposes. What do we mean by worthwhile? You will receive more than the valuation fee back in the first year in increased depreciation that you will be able to claim by having a full apportionment completed.
It has been said that Chattels Valuations for claiming depreciation are probably only worthwhile for commercial or high value domestic properties owing to the cost of getting one done.
Not so. Here are a couple of examples:
- A commercial warehouse that is literally a shell would result in one finding it hard to get sufficient increased depreciation out of that property. In this instance the Valuer should talk to the investor about the options and other benefits of the chattel valuation.
- Property was purchased for approx $500,000 as an Investment Property. A chattel valuation for this property would not be worthwhile as the land was worth $495,000 and the “outhouse” was worth the remaining $5,000.
What you need to consider is the proportion of the land from the Registered Valuation as a percentage of the Market/ Capital value. This has a large bearing on as to if a chattel valuation is worthwhile.
What you are doing by having a chattel valuation is claiming the correct depreciation rate for that particular asset (as advised by the IRD). Let’s take carpet as an example. By breaking the carpet out as a separate identifiable item, placing a specific value on the carpet, you are able to claim depreciation at 33% (diminishing value) giving an estimated life span of 5 years. (The longer the estimated life span the lower the depreciation rate). If the carpet had not been identified as a separate item depreciation could have still been claimed but possibly at 4% (estimated lifespan of 50 years) with the rest of the house.
In effect what is happening is the depreciation reflects the approximate lifespan of the asset so that you can replace it when it wears out. The asset will depreciate to the same nominal value. In the case of carpet it is whether this happens over 5 years of 50 years.
The depreciation then reflects the expected lifespan of that particular specific item.
A chattel is not necessarily just an oven but can include pretty much everything from the letter box at the front gate, the concrete path to the front door, curtains, carpets, stoves, kitchen cabinets, bathroom fixtures, floor coverings, internal non-load bearing walls, TV aerial on the roof, the garden shed, to the back fence etc. (As per the IRD Tax guide).
Other benefits for a Chattels Valuation include:
- A full breakdown of chattels, their values and the IRD depreciation rates.
- Reduced risk of penalties. This means if you are ever audited by the IRD you have substantiated values by a specialised independent third party (See our comment in the January 2005 edition of KPI in the Experts Forum)
- Easy disposal of assets. If you ever replace an item you have an accurate book value that can be written off (as opposed to your accountant taking a (conservative) guess as to its value). The new chattel is depreciated at its receipted costs.
- Minimise depreciation recovery. The report can be utilised to assist in minimising depreciation claw back when you sell the property.
- Increased cash flow by maximising the depreciation you are able to claim.