Tax relief for earthquake strengthening work?

Question from John updated on 13th December 2013:

I own two apartments in a heritage building which are part of a hotel operation. It looks like they will need earthquake strengthening soon. At present they meet council requirements but further changes to strengthening codes after the recent Christchurch earthquakes will change this. Is there or likely to be any tax relief for this type of expenditure? It will be considerable.

Our expert Mark Withers responded:

The question of whether earthquake strengthening is a deductible repair or a non-deductible capital improvement will no doubt become as big an issue as expenditure to fix leaky buildings. I doubt it will be possible to offer a blanket yes or no answer to the question generally as the IRD will no doubt expect every case to be examined on its merits.
To determine the capital verses repairs and maintenance question, the IRD first expect you to identify the asset. I.e. is the expenditure creating an entirely new and distinct asset or is the work merely on an existing asset? In the case of earthquake strengthening it is likely that the asset is the actual building as the work will be on the physical structure of the building. Having established this, the taxpayer then must consider whether the work goes beyond simple maintenance. I.e. is the work so significant in nature and in cost that it couldn’t be considered to be simple maintenance but rather it substantially improves or extends the life of an existing asset. This is where the hurdle for earthquake strengthening will probably lay. Much of the expenditure will not be required to remedy any actual wear and tear defects but rather to lift the quality of the structures to comply with modern earthquake standards. In many cases the original building will probably never have been sufficiently earthquake compliant to meet the modern standards expected. If however, the strengthening requirement is as a result of general decay or wear and tear on the building the scope for deductibility will be greater. I suspect that the tax department’s assumption will generally be that earthquake strengthening is ‘betterment’ of existing structures and as such much of the work will be capital in nature. But as I’ve said, it will be a case of every case on its merit.

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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