It’s no secret that New Zealanders have a long-standing love affair with property investment, so it’s no surprise that property investors are under closer scrutiny from Inland Revenue in regards to their property tax affairs.

One area that seems to be attracting increased focus from the Commissioner, is the deductibility of repairs and maintenance.

The legislation that is in place currently, which governs the criteria for deductibility, is complicated at best. The Inland Revenue released an Interpretation Statement IS 12/03 to give tax payers guidance and there have been a lot of articles and publications from experts in the field too.

In determining an amount of expenditure, some of the points that the Commissioner takes into account are:

• The extent of the work done
• Impact of the work done on overall value and rental yield
• Total cost of the work
• If any betterment has been achieved (keeping in mind that they view having to make improvements for earthquake strengthening and council building consent requirements to be capital in nature).

The Commissioner views that each case is to be decided on its own merit so the legislation is subject to individual interpretation.

Often it can be simple to determine if an amount spent is repairs and maintenance, or on capital account. For example, the replacing of a broken shower head is obviously repairs. It’s not as simple if the work is more substantial due to the lack of a regular maintenance plan, or unexpected circumstances such as a leaky building.

‘It is the Commissioner’s view that each case is to be
decided on its own merit so the legislation is subject to individual interpretation’

So, what do you do if you are a property investor who finds themselves in a situation where you have incurred significant costs that you believe should be classified as repairs and maintenance? The obvious first step is to talk to your adviser and get their advice on the correct interpretation before you file your tax return.

There are three approaches that you can take:

• To claim the entire amount of the work as repairs and maintenance. However, if the amount of the expenditure is significant, it is likely that the Commissioner could review this and you would need to be prepared to defend your position that the amount incurred meets the criteria to be deductible as repairs and maintenance. If the Commissioner disagrees with your position and is successful in her argument, and depending on the amount in question, your risk exposure to shortfall-penalties and use of money interest can be significant.
• Another approach is to capitalise all repairs and then file a Notice of Proposed Adjustment (NOPA), once the assessment of your tax return has been received, to request that the amount capitalised be expensed as repairs and maintenance. In the NOPA we present your argument for the costs, or an apportionment of the costs, to be repairs and maintenance. If IRD agree with your interpretation then they will amend the assessment to include the costs as repairs, allowing the deduction. If the Commissioner does not agree with your interpretation then you are not subject to any penalties or use of interest as you have taken an acceptable tax position from the Commissioner’s view when filing the initial tax return.
• The third approach you can take is to apportion the amount of work between repairs and capital. Although this is a more conservative approach than claiming the entire amount of the work undertaken, there still have been cases where the Commissioner has successfully argued that repairs done at the same time as capital work, take on the nature of being capital.

Carole and her team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz