Is insulation maintenance?

Question from Richard updated on 24th October 2012:

I have read on that insulation is simply maintenance to the building and is classed as repairs.  I had batts put in the roof (to replace insul fluff) and insulation added to the under floor of the house. I gave the receipt to the people that do my return and they say that I can’t claim for the batts or insulation. Can you please advise who is correct in this matter?

Our expert Mark Withers responded:

You are experiencing one of the realities of forming tax positions, they are often based on one person’s own interpretation of the law and it is not uncommon to find a divergence of opinion. Remember, you experienced this work and your accountant just looked at an invoice. Your answer swings on whether the new batts constitute capital improvements to the property (non deductible and non depreciable) or simply amount to repairs to the building (fully deductible). The first step is to identify the asset, the insulation serves no useful purpose by itself, it only performs its function when attached to and installed in the building i.e. the asset here is the building not the insulation. You say you removed old insulation and replaced it with a modern equivalent. The fact that it is a modern equivalent does not automatically render the cost a capital work. You must assess the "nature and extent" of the work and its effect on the overall building asset. The law also asks you to contemplate whether the works have gone beyond remedying fair wear and tear.  Ask yourself whether they have materially altered the fabric of the building asset?  Have they increased the buildings value? Did the work enable you to derive a higher rent? Did you increase the buildings insured value having installed the insulation? ..... I doubt it. Remember also that the IRD have now adopted a much stricter view of whether an item of expenditure on a residential property can constitute a distinct asset in its own right. This was to reign in the practice of generating higher depreciation claims by compartmentalising buildings. The obvious flip side to the IRD logic here is that if the item is not considered a separate capital asset in its own right it must be part of the building. The question then is simply whether the extent of the work is significant enough to be considered capital or alternatively a revenue expense. I consider that in this day and age having adequate insulation in a rental house would be considered a minimum tenant expectation, much in the way having a working stove would be. A property simply isn't up to minimum standard without it, hence the Government’s subsidy to remove all excuses for not having this type of work done. Maintaining a property at a minimum acceptable standard would generally be considered a revenue expense. My view is that your works are deductible maintenance costs but I accept that it is possible others may view it differently such is the nature of tax law.

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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