Commercial building depreciation returned to a 0 percent rate from the 2024 to 2025 income year, beginning 1 April 2024 for most taxpayers. Commercial fitout, however, remains separately depreciable. For owners of commercial property this makes the boundary between “building” and “fitout” one of the more valuable distinctions in the tax code, and one that many owners have not revisited since the rules changed.
This article explains the current position in plain terms. It is general information only. Tax treatment turns on specific facts and you should confirm your position with a tax adviser or a qualified quantity surveyor.
The current position in short
Buildings with an estimated useful life of 50 years or more depreciate at 0 percent. Commercial fitout is a separate class of depreciable property and continues to attract depreciation deductions at the applicable rates. The practical consequence is that correctly identifying and separating fitout from building creates a genuine, ongoing deduction that would otherwise be lost entirely.
What counts as commercial fitout?
Commercial fitout means the non structural items within a commercial building that are attached to it but are distinguishable from the building itself. Typical items include:
- Internal non load bearing partitions and glazed partition systems
- Suspended ceilings and ceiling grid
- Floor coverings, including carpet and vinyl
- Built in joinery, kitchens, tea points and reception counters
- Electrical reticulation serving the fitout rather than the building
- Data and communications cabling
- Air conditioning units and associated fitout services
- Light fittings
- Signage, security systems and access control
- Sanitary fittings and fixtures in some cases
- Blinds, window treatments and similar
What does not count is the structure itself: foundations, structural frame, floors, external walls, roof, and the fixed services regarded as integral to the building.
The boundary is genuinely technical in places. Air conditioning, lifts, sprinkler systems and electrical mains are the common points of contention, and this is where a quantity surveyor’s apportionment report earns its fee.
The 15 percent deemed fitout rule
For commercial buildings acquired before the 2010 to 2011 income year where the fitout was not separately identified at purchase, Inland Revenue allows owners to deem a portion of the building’s adjusted tax value as fitout and depreciate it separately. The permitted amount is up to 15 percent of the adjusted tax value of the building as at the start of the 2011 to 2012 income year, less the tax book value of any fitout already separately identified.
This is a concession specifically designed for owners who bought a building as a single asset and never split out the fitout component. Where it applies and has not been claimed it is often material.
Separating fitout on more recently acquired buildings
There is also a pathway for owners who acquired commercial property in the 2020 to 2021 through 2023 to 2024 income years, during the window when building depreciation was temporarily reinstated at 2 percent, and who depreciated fitout as part of the building rather than separately. These owners can apply to Inland Revenue to have the fitout separated out so that it continues to attract depreciation now that the building rate has returned to zero.
If you bought commercial property in that window and treated the acquisition as a single building asset, this is worth reviewing. The deduction is otherwise lost permanently.
Landlord or tenant: who claims the fitout?
The general rule is that depreciation follows ownership, and ownership is determined by the lease and the funding arrangement, not by who physically occupies the space.
| Scenario | Who typically owns the fitout | Who typically depreciates |
|---|---|---|
| Tenant funds and installs own Cat B fitout | Tenant | Tenant |
| Landlord funds fitout, amortised into rent | Landlord | Landlord |
| Landlord contributes a capped cash sum | Depends on lease drafting | Depends on lease drafting |
| Landlord delivers turnkey fitted suite | Landlord | Landlord |
| Tenant fitout gifted to landlord at expiry | Transfers at expiry | Changes at transfer |
The middle case, a landlord cash contribution to a tenant’s fitout, is the one most often handled loosely. The lease should state explicitly who owns the resulting asset. Where it does not, both parties can end up with an unsupportable position.
There are also income tax consequences for the tenant on receipt of a landlord contribution, and the treatment depends on how the contribution is characterised. This is worth advice at the time the lease is negotiated rather than at year end.
Why this matters more since 1 April 2024
When buildings depreciated at 2 percent, the cost of misclassifying fitout as building was a lower deduction. Now that buildings depreciate at 0 percent, misclassification means no deduction at all on that portion of the asset for its entire life.
For a landlord carrying out a significant refurbishment or a Cat A upgrade to attract tenants in a competitive leasing market, the split between capital improvement to the building and depreciable fitout has a direct effect on after tax return. It is worth getting a quantity surveyor’s apportionment at the time of the works, when the cost information is available and accurate, rather than reconstructing it years later.
Repairs and maintenance versus capital
A separate but related question is whether work is deductible immediately as repairs and maintenance or must be capitalised and depreciated. The general test looks at whether the work restores an asset to its previous condition, which points toward deductible repairs, or whether it improves, enlarges or substantially replaces the asset, which points toward capital.
The identification of the relevant asset matters. Replacing a worn section of carpet in one meeting room is likely repairs. Replacing all floor coverings across a floor plate as part of a wider upgrade is more likely capital. Refurbishment projects frequently contain both, and separating them properly at the time of the works is far easier than after the fact.
Practical steps for owners and asset managers
Commission a fitout apportionment on acquisition. A quantity surveyor’s report at purchase splits the price between building and fitout and supports the deduction for the life of the asset.
Review pre 2011 holdings for the 15 percent deemed fitout claim. If the building was acquired before the 2010 to 2011 year and fitout was never separated, check whether the concession has been applied.
Review acquisitions from the 2020 to 2021 to 2023 to 2024 window. Where fitout was folded into the building, an application to separate it may restore a lost deduction.
Cost code refurbishment works properly at the time. Ask the contractor for a cost breakdown that supports the building, fitout, and repairs and maintenance split. This is far cheaper to produce during the project than to reconstruct afterwards.
Record disposals. When fitout is removed during a refurbishment or defit, the residual tax value of the disposed asset generally gives rise to a loss on disposal. This is frequently missed, and it is real money.
Frequently asked questions
Can I still depreciate commercial fitout in New Zealand? Yes. Commercial building depreciation returned to 0 percent from the 2024 to 2025 income year, but commercial fitout remains a separate class of depreciable property and continues to attract depreciation deductions.
What is the 15 percent fitout rule? For commercial buildings acquired before the 2010 to 2011 income year where fitout was never separately identified, Inland Revenue permits owners to deem up to 15 percent of the building’s adjusted tax value as fitout and depreciate it separately, less any fitout already separately recorded.
Does a tenant depreciate their own fitout? Generally yes, where the tenant funds the fitout and owns it under the lease. Ownership under the lease terms is the determining factor, not occupation. Confirm the position in the lease before assuming it.
Is a defit or make good cost deductible? Reinstatement costs are generally deductible where they relate to restoring premises rather than creating a new asset, and the disposal of the removed fitout generally gives rise to a loss on disposal for its residual tax value. Both should be considered together, and both need advice.
Do I need a quantity surveyor? Not legally, but a quantity surveyor’s apportionment report is the standard supporting evidence for a fitout split and is generally expected to substantiate the position. The cost is usually recovered many times over in the first year of deductions.
Related reading
- Make Good Obligations in NZ Commercial Leases: A Tenant’s Guide
- Cat A vs Cat B Fitout: What NZ Landlords and Tenants Need to Know
- Auckland Office Vacancy, Incentives and the Flight to Quality
Sources
- Inland Revenue, commercial building and commercial fitout depreciation guidance
- Income Tax Act 2007
- Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024, removal of commercial building depreciation
- Johnston Associates, commentary on commercial building depreciation removal and fitout treatment
- Leech and Partners, commentary on depreciation changes
This article is general information and is not tax advice. Depreciation treatment depends on your specific circumstances, the terms of your lease and the nature of the assets. Obtain advice from a qualified tax adviser or quantity surveyor before acting.