Capital vs maintenance?

Question from Louisa updated on 1st February 2013:

I recently had to do some major work in the bathroom of my rental property. The wall linings in the shower were rotting due to the age of the materials and water was leaking into the wall. It was therefore necessary to rip the entire thing out and replace it, which couldn't really be done without the wall re-gib and re-tiling the floor etc. So as the bathroom was being gutted anyway, I replaced the old vanity and toilet as well as the shower. These were very old and would have needed to be replaced in the near future anyway. I did not extend the room at all or put in anything extra. But the room was re-gibed, painted, tiled etc. All up the cost was $15,000. So my dilemma is whether I can claim this as repairs and maintenance or whether it would be deemed a capital expense? I need to determine my tax position and I am still unsure what call to make here. Any guidance would be much appreciated!

Our expert Mark Withers responded:

There are three steps required to determine whether the expenditure is deductible as repairs and maintenance. Firstly, identify the asset. If you have created a distinct asset it is likely to be capital. In this case the asset is the building and your works do not appear to have created a new building distinct from the original. Secondly, assess the nature and extent of the work and the effect this work has on the character of the asset. Thirdly, assess whether the work has gone beyond remedying fair wear and tear and has improved the asset beyond what could be considered simple maintenance. In practice you need to consider how long you have owned the asset and whether some of the issues existed at the point of purchase. Did you increase the insured value of the building having done the work? Were you able to increase the rental having done the work? If so these can be indicators of capital works rather than repairs and maintenance. Before and after photos giving some context to the damage are also useful if the matter leads to dispute. Without having seen the work or the nature of the issues fixed it is difficult to be categorical with you but these are the principals IRD would use to form their view.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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