The age-old question of whether work on a house is a deductible repair and maintenance (R&M) expense, or a capital expense has prompted many disagreements between property investors and Inland Revenue.
An example of this issue is illustrated in the recent High Court case of Lawrence v Commissioner of Inland Revenue [2024] NZHC 905. Here, the investor purchased a rental property in 2014. The investor discovered leaks and completed remediation work. The expenditure incurred from the remediation work was claimed against rental income for the 2018 and 2019 years. Inland Revenue did not accept this tax position and claimed the remediation work was a capital expense and not deductible.
The deductibility of remediation work will depend on the nature and extent of the work done to the asset. The Court in Lawrence held this was a clear-cut case as the nature and scale of the remediation work resulted in the reconstruction or renewal of substantially the whole of the house and changed the character of the asset. This meant it was wrong for the investor to claim a deduction for the remediation work.
So, what exactly was the extent of the remediation work completed?
A more detailed report is available in IRD publication “CSUM 24/05” but to summarise, the work involved:
- Roof redesign
- Roof replacement
- Gutter replacement
- New cavity / cladding system
- New decks
- New stormwater disposal system
- Extensive internal work
The Court determined the extent of the work was not merely a replacement of the defective parts of the property. We note in this case, the remediation work affected nearly every part of the property. Each case will turn on its particular facts.
If you are considering remediation work and have questions about the tax treatment, please get in touch with one of the team.