HWI Chartered Accountants Auckland

 A number of rental properties have now had substantial remedial work completed to fix leaky building issues. The question now for many owners is “is this expenditure deductible?”

Expenditure over and above normal repairs and maintenance is considered to be a capital account (balance sheet item) and it is not deductible.

The issue of capitalisation versus deductibility needs to be considered on a case by case basis . When considering remedial work done to a leaky building it is necessary to consider the nature of the actual work done in it’s various components. It is a question as to whether the expenditure replaces defective parts or renews or replaces substantially the whole asset. As a guideline the cost of renewing, replacing or reconstructing substantially the whole asset was found to go beyond repairs and was therefore on capital account in CIR v Auckland Gas Co Limited (1999) 19 NZTC 15,011.

Work that changes the nature and character of the asset is generally capital. For example the re-cladding work done on a leaky building using a different material as a permanent solution to water leaks is likely to be capital as it has changed the nature of the property.

In Case T43 (1998) 18 NZTC 8,287 re-cladding of an originally good but now dilapidated wall was held to be deductible as the work carried out was a repair to the original work and not the creation of a new work. In other words the building was brought back to its original form by repair work and so the repair costs were deductible.

If the property had leaky building syndrome when purchased then arguably anything that fixed the leak would be improvements from when it was purchased and on that basis would be capital. There has been commentary to say that anything that is fundamental to the structure of the building is capital in nature. Hence it is important to understand the nature of the work undertaken.