IRD have recently reissued their draft position on deductibility of the cost of obtaining a “detailed seismic assessment” (DSA) on buildings. In recent times we have seen a large increase in focus on ensuring building assets are able to withstand earthquakes.

The key issue is whether the costs of these reports are capital. The statement recognises that there are a large number of circumstances that could lead to a building owner obtaining a DSA. They may be required to by building regulations, by council, insurance providers or tenants, or be seeking to get a better understanding themselves of their building’s safety.

The draft position from the IRD concludes that regardless of why the DSA is requested that the test to be applied is whether the DSA is obtained as “part of either a capital project to seismically strengthen a building or a capital project to develop or improve a building”. If the DSA is part of this project it is a capital cost, otherwise the costs are deductible as part of the cost of owning the building asset.

While this sounds fairly straightforward, the tricky part is deciding whether the report is “part of” a capital project. For example, if where at the time the DSA has been arranged there was no intention to carry out an improvement project, but because of concerns raised in the report a major strengthening may be required would this be part of the capital project? The statement does not clarify whether the DSA cost is part of the strengthening project in that case.

Until recently we would have looked at whether the taxpayer had decided to carry out the project at the time they had requested the DSA (and if not committed, treat the cost as deductible). But this may have been changed by the recent decision in the Trustpower case (Which dealt with resources consents obtained as part of a feasibility study). Trustpower would suggest the DSA report could be part of carrying on the project even where the costs were incurred before that decision was made.

While the principle stated in the IRD’s draft statement is correct, it doesn’t adequately deal with where the dividing line falls.