Repairs and maintenance can represent a substantial expense within a business and therefore can have a huge impact on the tax you have to pay. For this reason, Inland Revenue has a strict policy on repairs and maintenance clearly explaining what is considered repairs and maintenance and deductible and what is considered capital expenditure.
Repairs and Maintenance Generally
What are repairs?
- ‘Repair’ is restoration by renewal or replacement of subsidiary parts of the whole. Expenditure of this nature can be an allowable deduction.
- ‘Renewal’ is reconstruction of the entirety (not necessarily the whole, but of substantially the whole subject-matter).
- Only expenditures on repairs and maintenance are deductible as ‘repairs’. The principal features are that:
- Expenditure on repairs, maintenance, and alterations must be not be capital expenditure.
- Expenditure required to maintain an asset in the same condition as when you acquired it is deductible.
- Expenditure on an asset over and above making good wear and tear is not deductible.
Repairs and Maintenance to Ancillary Plant
Expenditure is deductible when it is:
(a) Repairs and maintenance of existing equipment; and
(b) Alterations not amounting to significant improvement.
Expenditure is of a capital nature and not deductible when it is:
(a) Installation of new equipment;
(b) Replacement of a whole new asset; and
(c) Major alterations to the extent that they are an improvement.
Repairs and Maintenance for Rental Investments
Investments in rental properties have proved to be very attractive to New Zealand taxpayers. However, property owners should be aware of the following:
- Repairs and maintenance expenses are only claimable if the repairs were carried out while the tenant was still living in the house or the house was still available for renting.
- Often overseas owners returning home realise the damage done to the property after the tenants have moved out – and because of the change to private use, IRD may not allow a claim for repairs of such damages. There have been instances in the past where such claims have not been allowed. Unless IRD is satisfied with documentary evidence to the contrary, a couple owning a property jointly cannot split rental losses unevenly. Often the higher income earning spouse claims all or most of the losses, when they should be split equally.
Repairs and Maintenance to Buildings and Fittings
You need to take particular care with repairs and maintenance on buildings and fittings. The following is a list of common types of repairs to building and fittings, along with comment on how the expenditures are likely to be treated for income tax purposes.
|Payment for:||Expense||Asset to be depreciated|
|Architects’ and consultants’ fees||X|
|Braces to strengthen a building — structural alteration||X|
|Building alterations – cutting a new doorway||Unless alteration to inner fixtures.|
|Building alterations – replacing doors||X||X|
|Building alterations – installing of new doors where no door existed||X|
|Building site expenses||X||X|
|Dilapidation and deferred repairs and maintenance||Normal recurring expenditure||Work of a major nature|
|Fire or earthquake precautions||X|
|Hand basins and toilets||X|
|Lawns and levelling||X|
|Parapets||Initial or full replacement|
|Paths and flagstones||Normal repairs||X|
|Pillars||Moved to new position||Removed altogether and replaced|
|Rental property repairs||Must form part of a continuous income-earning process, or one which has discontinued but is soon to be resumed. It must be related to income earned at that time or shortly afterwards.|
|Shelter trees (other than farmers)||X|
|Shop fronts modernisation||X|
|Strongroom||Moved to new position||Installation
|Windows||Replacement of damaged window with new window of same type.|
|Windows tinting||Subsequent treatments||Initial treatment|