Tax Talk | Tax relief for flood-hit businesses

The government has announced tax relief for North Island businesses hit by flood damage. The relief comes in the form of a deferral of tax on insurance receipts, allowing time for the business to rebuild or purchase replacement assets.

Time to read: 2 mins

This form of tax relief was also used following the Christchurch earthquakes in 2011 and Kaikoura earthquake in 2016.

Broadly, the cost of the replacement asset would be adjusted for tax purposes to reflect the insurance receipt instead of depreciation recovery income arising.

The many businesses impacted by the weather events of January and February will welcome this relief, as the tax consequences of insurance receipts can be a nasty shock at a time when these businesses are trying to rebuild.

Instead of depreciation recovery income arising, the cost of the replacement assets for tax purposes would be adjusted to reflect the insurance receipt. While that adjustment will reduce future depreciation claim, the additional tax liability would be spread over several years instead of arising upfront.

One planned change is that buildings would not need to be located in the same region, given discussions about managed retreat.

It is noted farmers and horticulturalists whose crops are uninsured should be able to separately claim deductions under existing legislation for the residual book value of destroyed trees and vines, and their removal costs.

Baker Tilly Staples Rodway comments

We consider the proposals a pragmatic response that has previously worked well for businesses impacted by earthquakes in Canterbury and Kaikoura. 

The draft Tax Bill is not yet available. It will also take several months for the Bill to go through the Parliamentary process. While we expect this relief should get bipartisan support, nevertheless there may be some devil in the detail and there could be changes to the draft Bill during the legislative process.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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