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:
• Minor additions or alterations to the building. As examples of such minor additions/alterations the IRD talks about installation of battery-powered smoke alarms, sealing unnecessary gaps or holes to meet draught stopping standards, minor work to meet ventilation and moisture ingress and drainage standards.
• Future replacement of items that were treated as capital improvements to the building when installed
• Costs of recordkeeping, such as paying management fees for healthy homes compliance services
On the other hand, there is a long list of costs that will not be deductible as repairs and maintenance including:
• Installation of new insulation
• Ducted or multi-unit heat pumps
• Flued fires (wood or gas)
• New or replacement openable windows
• New exterior doors
• Most extractor fans or rangehoods
• Ground moisture barriers
• Stormwater drainage, gutters and downpipes
• Underfloor vents
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.