Case-by-case depreciation

Question from Zane updated on 14th March 2013:

In October 2002 I purchased a dilapidated block of three units comprising of one three-bedroom flat and two two-bedroom flats. Improvements have resulted in new spouting and redoing parts of the roof, along with the internal refurbishment of the units (including new kitchens, bathrooms and the removal of walls to create an open-plan, replacement of any painted hardware etc). Most of these costs were capitalised prior to 31 March 2011 in order to depreciate them over future years. My issue is a leaky conservatory attached to one of the units which requires replacement keeping the original concrete floor area. Now that we can no longer capitalise this type of expenditure for amortisation over future years can we expense the cost in the year that it occurs and how do we draw a line in the sand between what is or is not capital expenditure?

Our expert Mark Withers responded:

It's not that the costs can't be capitalised, its the fact that capital expenditure is now "black hole" expenditure from a tax perspective given that it can be neither deducted nor depreciated. The question of whether it can be deducted as a repair or must be capitalised though is a case by case exercise. The IRD expect you to firstly identify the asset in question, if the expenditure is on a seperate asset it must be capitalised as such, if it simply maintains an existing asset it may be deductible. Next, you are expected to consider whether the work goes beyond what could be considered maintenance, this would be the case if the expenditure is significant and essentially replaces the asset. You must also consider the dilapidation issue that you have mentioned. If the fault existed when you purchased the property the IRD would generally consider it to have been factored into the price paid and as such the subsequent work would be capital. It is all a question of extent and degree and is inevitably subjective.

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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