Increase in deferred tax on buildings

Legislation to remove tax depreciation on commercial and industrial buildings was enacted at the end of March 2024. Building structure assets will be subject to 0% tax depreciation from the 2024-25 income year onwards, but building fit-out assets will continue to be depreciable. Essentially, this change takes tax depreciation on buildings back to the settings that applied from 2011 to 2020.

As a result of this legislative change, an adjustment to deferred tax on buildings will need to be recognised in the 2024 accounts for taxpaying entities with March or June balance dates. The increase in deferred tax associated with this change will be recognised against tax expense.

This adjustment generally applies to buildings classified as property, plant and equipment. It would also apply to investment property buildings, where the presumption of recovery by sale has been rebutted.

As you may recall, tax depreciation on buildings was originally removed in 2010, but was reintroduced for commercial buildings in 2020, although at a reasonably low depreciation rate. Many entities were required to recognise additional deferred tax liabilities in relation to buildings in their 2010 accounts, but these adjustments were at least partially reversed in 2020.

Now that tax depreciation on commercial buildings has again been removed, the adjustments previously recognised in tax expense for the reintroduction of depreciation of buildings will need to be unwound.

In most cases, it is expected that the increase in deferred tax on buildings recognised in the 2024 accounts will be similar to the reduction in deferred tax recognised in the 2020 accounts. However, other adjustments may be required for building costs recognised between May 2010 and March 2024, except to the extent that the initial recognition exception applies.

This change is likely to have a significant impact on the tax balances for many entities with building assets, including airport companies, licensing trusts, airport authorities, and certain CCOs.

Please refer to the Deferred tax calculation guidelines on our website for further information.

This document is intended only as a general guide, and should not be used or relied upon as a substitute for specific professional advice. No liability is accepted for loss or damage incurred by persons who rely on this document.

Page created: 20 May 2024