While there were whispers about favourable tax depreciation changes being included in Budget 2025, it is fair to say that the Investment Boost announced took many by surprise.
The Investment Boost is intended to encourage capital spending by businesses by front loading tax deductions via an immediate 20 per cent deduction for qualifying spend on top of normal depreciation deductions.
This is estimated to cost $1.7 billion annually in tax, but the government estimates that, in turn, this increased investment in assets will lift GDP by 1% and lift wages by 1.5% over the next 20 years.
What is the Investment Boost?
Effective from May 22, 2025, businesses will have the option to be able to take an upfront tax deduction for 20% of the cost of any new assets or improvements to existing ones. This deduction does not get apportioned for the number of months an asset is held, so the deduction is the same whether the asset is bought at the start or the end of the year.
If an asset qualifies for depreciation deductions, the remaining cost will still be depreciable. Although commercial buildings remain non-depreciable, they will also be eligible for the 20% investment boost deduction.
What assets are eligible?
The Investment Boost applies to most new or new to New Zealand assets that are depreciable for tax purposes but second-hand assets will not qualify unless they are newly imported into New Zealand. There are no limitations on who can use the rules, it applies to businesses of all sizes, and assets of any value.
For capital projects in progress at May 22, the deduction will be available on the full project cost where the resulting asset is first available for use on or after this date, even where the capital spend was incurred beforehand.
The Investment Boost also applies to orchard/farm/forestry development expenditure that is claimable under the special primary sector deduction rules, but only to the extent that costs are incurred on or after May 22. This should be a significant cashflow benefit to anyone doing new development in the Bay of Plenty region.
What assets aren’t eligible?
- Assets that have been previously used in New Zealand
- Land – however, land improvements will be eligible
- Trading stock
- Residential buildings – there will be exceptions for hotels, hospitals and rest homes
- Fixed-life intangible assets, such as patents and plant variety rights
How to implement the Investment Boost?
It might be tempting to immediately expense 20% of the cost of qualifying assets and only capitalise and depreciate the remaining 80%. This will give a nice solution in terms of calculating depreciation in the first year.
However, it is not the recommended approach as you need to be able to track the total cost and deductions over time so that a future disposal can be correctly accounted for.
Some fixed asset systems may have existing functionality to allow the 20% to be calculated and deducted from the cost before then calculating depreciation for the year. Others may need some software updates or work-arounds provided by the software suppliers. The best thing to do right now is to ask your software provider how you should be reflecting the Investment Boost deduction in your fixed asset register.
There are other practicalities and flow-on effects of the Investment Boost which will need to be considered. For more information about how the Investment Boost could impact your business and capital expenditure plans, reach out to your tax advisor.
Related: The latest on FBT – Part 2
