Adding to the uncertainty for rental property owners has been the question of whether repair costs are immediately deductible as ’repairs and maintenance’ (R&M).
Inland Revenue has assisted by providing guidance on determining whether repairs are deductible. The 2012 Interpretation Statement ‘IS 12/03 Income – deductibility of repairs and maintenance expenditure – general principles’ includes specific examples, but the issue is very fact specific and a matter of judgement.
Illustrating the continued uncertainty, Inland Revenue recently released Technical Decision Summary 23/07: Whether expenditure to resolve weathertightness issues is deductible. The TDS covers a dispute regarding leaky home expenditure deducted by a taxpayer and the decision by the Tax Counsel Office (TCO).
The dispute concerned a taxpayer who owned a rental unit within a block of six units, which were all connected by inter-tenancy walls. The block was also a part of a wider complex, consisting of other similar blocks. The unit in question required remediation work to resolve weathertightness issues.
While the property was untenanted, the remediation work was carried out by the body corporate and paid for by the taxpayer via a special levy. Simultaneously, the taxpayer also incurred expenditure for their unit to be painted.
The question was whether the capital limitation applied to deny the deductions claimed by the taxpayer in relation to the remediation and the painting. Inland Revenue asserted that the entire cost (including the painting) was capital, as the remediation work involved a reconstruction of the whole asset, or at the least, changed the character of the asset.
Conversely, the taxpayer argued that the expenditure incurred was deductible R&M as the remediation
work was mostly limited to certain portions of the inter-tenancy walls and decks, while the painting comprised ordinary repairs and maintenance expenditure.
The TCO considered three relevant elements:
- Whether the work resulted in the reconstruction, replacement, or renewal of the asset, or substantially the whole of the asset?
- Whether the work done had the effect of changing the character of the asset?
- Whether the work was part of one overall project or was a series of projects that merely happened to be undertaken at the same time?
The TCO concluded that in the context of the remediation, the relevant asset was the block, given that the work was undertaken by the body corporate on a block-by-block basis and was not carried out solely within the boundaries of the unit. The work changed the character of the block due to the proportionally high costs, and the structurally significant improvements to the affected areas, which were important to the operation of the asset.
Hence, the capital limitation applied to deny a deduction for the remediation work. Conversely, the painting work was undertaken separately from the remediation work and considered deductible R&M.
