Question from Kevin updated on 17th May 2013:
Our property has been rented permanently for a number of years. We now need to upgrade replacing carpets, drape, painting etc. Are these costs expenses (deductable repairs and maintenance) or do they need to be treated as capital expenditure?
Our expert Mark Withers responded:
The IRD has recently released a 55 page interpretation statement designed to assist with the repairs and maintenance verses capital queestions available from www.ird.govt.nz It contains a useful flowchart that goes something like this... Determine if there is a general nexus with the income earning activity, determine if the capital limitation applies, determine, what the asset is that is being worked on, i.e. is the asset the building or some distinct asset. Is it physically or functionally distinct from the building? Then examine the nature and extent of the work. If the work has reconstructed, replaced or substantially renewed the asset it is capital. Has the nature and scale of the work changed the character of the asset, if so, capital. Other considerations ... was the work an accumulation of deferred repairs? Was the work a single overall project or piecemeal attendances? Was it recently acquired or only recently rented? Did the rent increase after the work? Was the insured value of the asset altered after the work? As you can see the question is typically one of extent and degree. Remember also the IRD does allow depreciation on capitalised individual chattel assets that are not attached to the building. Carpets and drapes may fall into this category but painting would generally be repairs and maintenance subject to the comments above. One thing is for sure, the question is always grey, never black and white. Before and after pictures can be extremely useful if a dispute over the tax treatement erupts.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.