Taxing implications from quake

Earthquake-affected businesses in Christchurch are being urged to ensure they make the correct tax decisions to avoid facing more problems than just the devastation with which they are dealing.

Deloitte Dunedin tax partner Peter Truman said most business owners would be focusing on getting back to normal, restarting operations and employing their staff.

However, they were probably making decisions now which would have tax implications down the track. Once those decisions had been made, the tax implications were impossible to change in the future.

The loss on destruction of buildings was usually seen as a capital loss and was not tax deductible.

"There is an exception to the general rule that applies where a building has been irreparably damaged and is unable to be used to derive assessable income - provided that the damage was not caused by the landlord.

"Where that criteria was satisfied, a loss on destruction will be available."

A loss on assets other than buildings was tax deductible. Assets should ideally be scrapped and disposed of by the balance date, Mr Truman said.

Insurance proceeds for an asset that was irreparably damaged were deemed to be proceeds on the sale of the asset. That could lead to depreciation being recovered if the sale proceeds exceeded book value or a loss if the proceeds were lower.

The cost of repairing assets so they were back to their pre-earthquake condition would be deductible, he said. Repairs that improved the asset were likely to be classified as capital expenditure.

Insurance payments for damaged - but repairable - assets were assessable and represented a net deduction off repair costs.

One of the more important areas was business interruption, Mr Truman said.

The proceeds of business-interruption or loss-of-profits insurance polices were assessable income.

The cost of relocating to new premises would be deductible where the principle purpose of the relocation was to maintain and preserve the existing structure of the business.

"The Inland Revenue Department argue that a move to larger or improved premises is capital expenditure and not deductible."