Leaky unit deduction

Question from Sarah updated on 25th September 2019:

I have a leaky unit that I am renting out and I’m also paying GST on the rent back to the IRD. The latest valuation is $0 value based on the weather tightness and the amount I have to pay to reclad it. But I paid a lot to buy the property. The rent I'm getting has declined a lot but I am still getting a bit of rental income after expenses.

I have another three rental properties. I do my own tax returns and GST returns. Because the valuation for the leaky unit is $0, can I attribute losses or have a reduced tax and GST I'm paying to the IRD? Or can I only claim losses when I sell it depending on the price I get?

Also, I'm living overseas. So I am a non-resident for tax purposes at present. But I will be returning to NZ to live in a couple of years. How does it work? Can I pay less tax on the current income?

Our expert Mark Withers responded:

Losses on disposal of buildings held on capital account in New Zealand are non-deductible in the same way that capital gains are not assessable. The only real question is whether the cost of remediation is deductible R&M or non-deductible capital improvement.

Now this is a real chestnut! Despite a decade of leaky buildings we still don't have a precedent tax case on the deductibility of leaky building remediation. In fact, most of our test cases on R & M relate to railway maintenance in the 1800's (a time when buildings didn't leak). The lack of a test case is probably because individuals are so emotionally and financially spent by the toll it all takes that nobody has had the energy to take a case.

IRD simply say "we assess every case on its merits". Unfortunately, in recent times there seems to be a hardening of attitudes at IRD with many repair claims being denied. One strategy is to file a return having capitalised the remediation and then lodge a notice of proposed adjustment seeking a change to allow the remediation as R & M. This forces IRD to consider the matter without you facing the risk of penalties for taking an unacceptable tax position. If they deny the deduction you can enter the formal dispute process.




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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