Articles by Matthew Gilligan
Readers will by now be well acquainted with the minimum standards under the Healthy Homes Regulations. Rather than discuss what landlords need to do to adhere to these standards, in this blog I want to address the debate as to the tax treatment of costs incurred in doing so.
In recent weeks the IRD have issued a draft statement for comment and discussion setting out their view. I am sure no reader will be surprised if I say that the IRD have proposed a relatively conservative viewpoint with a fairly narrow view of what costs will be deductible.
By way of summary, the IRD see the following types of costs as deductible:
On the other hand, there is a long list of costs that will not be deductible as repairs and maintenance including:
Some of these non-deductible items could be depreciated, although that is a fairly limited class which includes electric panel heaters, some heat pumps, through-window extractor fans, window stays, door openers and stops, external door draught excluders and devices for blocking fireplaces or chimneys. There is also potential for a deduction in regard to low-value depreciable items. The cost threshold was $500 at the time of writing, but in a late breaking Covid-19 related law change it has increased to $5,000 for assets purchased on or after 17 March 2020, and $1,000 for assets purchased on or after March 17 2021.
The IRD’s attitude is pretty much that any expenditure is likely to be capital unless it is repairing an existing asset or of a very minor nature. They have noted that in the context of insulation, one example of an expense that is still revenue in nature even though it represents a replacement with a superior product is where you are conducting a patch replacement of foil insulation (now banned under the Building Act) with a compliant product.
In my view, the IRD’s approach is disappointing given the mandatory nature of the work undertaken. It would seem to make more sense to incentivise landlords to meet these standards through the allowance of a deduction for expenses – rather than effectively penalising them.
There are also arguably technical grounds for claiming deductions for some of the work they argue is capital. The first step in any analysis as to whether an expense is deductible repairs and maintenance or non-deductible capital improvements, is to identify the asset in question. If the asset is the rental dwelling as a whole, there is arguably not a significant change in the character of the asset merely by adding a ducted heat pump or ventilation system, or adding insulation to parts of the property where there were none previously.
Finally, bear in mind that it is a draft statement and we await finalisation post public feedback. However, at this stage I am not holding my breath that there will be any relaxation of this attitude from the Inland Revenue.
Thanks John, You have been an excellent person and firm to deal with over the last ten years. Kerrie and I have really appreciated your advice. - Andrew and Kerrie - Brisbane, August 2018
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