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, which clearly explains what is considered to be deductible repairs and maintenance, and what is considered to be non-deductible capital expenditure.

Repairs and maintenance generally

Only expenditures on repairs and maintenance are deductible as “repairs”.

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).

Inland Revenue’s policy on repairs and maintenance is that:

  • Expenditure on repairs, maintenance, and alterations must be on revenue, not capital, account.
  • 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
  • Replacement of an asset is capital expenditure.

No deduction is available for notional repairs (ie, what it would have cost to repair an asset had the taxpayer decided not to just replace the asset).

A distinct physical unit which can function on its own is a unit against which the extent of any expenditure will be measured. Therefore, if a building is part of a larger complex, the particular building (and not the wider complex) will be the unit if it is a ‘stand alone’ building. Each situation will depend on its own facts, however.

Examples of assets considered to be units are motor vehicles (the unit is not the fleet of vehicles); individual buildings (not a complex of attached buildings); and a boat builder’s slipway (not the workshop, slipway and associated plant).

Capital or revenue?

Some of the tests which are applied in determining whether expenditure is capital or revenue are:

  • Does the expenditure increase the useful life of the asset, or its output or efficiency?
  • Is the expenditure recurrent?
  • Does the expenditure create a new asset that did not exist before?
  • Does the expenditure confer an enduring benefit to the taxpayer?
  • Does the expenditure relate to the profit-earning process or the profit-earning structure of the business?

You should not consider any of these tests in isolation, however.

Although deductions for capital expenditure are not allowed, capital expenditure will be subject to the depreciation rules

Examples

Some simple examples of repairs and maintenance are:

  • Replacing a broken shower head;
  • Plastering and painting a crack in the wall;
  • Replacing a blown element in a hot water cylinder;
  • Redecorating a rental property to return it to the state it was in when it was purchased to use as a rental property.

The following are some further examples of the application by Inland Revenue, and by the courts, of the above tests to various repair situations. Each case however, depends on its specific facts – these examples are provided as guidance only.

  • A horse trainer has 20 horse boxes that are in a dilapidated state because of wear and tear over the years. Instead of trying to repair the boxes the trainer replaces them. In this case an item has been completely replaced. The expenditure is capital so it is not deductible.

In the above example, the trainer would not be allowed a deduction for the notional cost of repairing the boxes (ie what it would have cost him to repair the boxes).

  • The owner of a three bedroom rental property is finding it increasingly difficult to find tenants for the building because of its run-down state. She does some alterations which replace the kitchen and bathroom, and merges two adjoining bedrooms into one. In this case the expenditure would be regarded as being too extensive to be a revenue expense. A deciding factor in this case would be that the rental property has been substantially improved.
  • The foreman who lives in a house on the taxpayer’s property is dismissed. The taxpayer decides to do some work on the house before hiring a new foreman. He has the house repainted, the guttering replaced with the same type of material and the front door (which the foreman kicked in as he departed) replaced. The owner cannot find a door with frosted glass exactly like the previous one, so he settles for the cheapest solid wooden door he can find. In this case the expenditure would be deductible. The repainting is recurrent expenditure and along with the reguttering and replacement of the door does not improve the house in any way. Further, the expenditure is not of sufficient magnitude to be on capital account.
  • A taxpayer buys a run-down property for $40,000 less than other similar properties in the area. Before she can rent the property out she does repainting, wallpapering, and replaces the bath and showers. In this case the expenditure will be on capital account because the house was recently acquired, and it was purchased for $40,000 less than it normally would have cost, because of its dilapidated state.
  • The taxpayer runs a courier business. The engine in his van seizes, and the van cannot be driven. He cannot afford to purchase a new van, so he buys a replacement reconditioned engine of the same make and capacity as the old engine. In this case the “unit” is the van. The replacement of the engine merely restores the van to a workable state so the expenditure is deductible.
  • The owner of a property has let out the house for five years. He lived in the house himself for 10 years before he started renting it out. The old concrete tile roof needs repairing, so he replaces it with a new steel-backed tile roof. Even though the roof has been replaced with different materials the house has not been improved in any way, so the expenditure is deductible.
  • A trotting club incurs expenditure on replacing a shell trotting track with a limestone track. The expenditure covers drainage, excavation, laying of foundations, grading of bends and approaches and replacement of the top layer of the racing track. The expenditure was incurred because the existing tracks had poor foundations and were considered unsafe and was likely to be of a one-off nature. The work done did not constitute repairs or alterations but was effectively the construction of a new track, and therefore capital.
  • A gas distribution company completes extensive works as part of an ongoing programme in which a polyethylene pipe is inserted into the existing cast iron and steel gas mains network. The work resulted in reduced maintenance costs and increased pipe capacity. The old pipes are abandoned, relegated to protecting the new pipes.
  • The network system is replaced by a new and different material, operating at higher pressure, housed in the old mains. In this case, the cost of the insertion programme is a substantial improvement of a capital nature and is not deductible. The polyethylene insertion, in its nature and scale, could not be regarded as merely a repair of the network. The replacement could not fairly be described as a method of fixing faulty joints and corrosion.
  • An electric power board company replaces overhead power lines with underground cables in a city. The work has been undertaken because an engineer’s report stated there was an urgent need to replace a large portion of the aerial distribution system because of its deterioration due to age. In this case, overall the work on the undergrounding programme is so substantial and is intended to produce such a different and operationally superior asset, that it is a capital improvement.

Repairs and maintenance to ancillary plant

Expenditure is deductible when it is:

  1. Repairs and maintenance of existing equipment; and
  2. Alterations not amounting to significant improvement.

Expenditure is of a capital nature and not deductible when it is:

  1. Installation of new equipment;
  2. Replacement of a whole new asset; and
  3. 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

Building alterations – installing of new doors where no door existed

X

Building site expenses

X

Cartage

X

Dilapidation and deferred repairs and maintenance

Normal recurring expenditure

Work of a major nature

Drainage, sewerage

X

Electrical work

Fire or earthquake precautions

Fire losses

X

Foundations

Only for normal repairs

Hand basins and toilets

Installation

Heating systems

Repairs

Installation

Lawns and levelling

X

Lifts

X

Murals

X

Parapets

Initial or full replacement

Paths and flagstones

Normal repairs

X

Pillars

Moved to new position

Removed altogether and replaced

Ramps

X

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.

Septic tanks

X

Shelter trees (other than farmers)

X

Shop fronts modernisation

X

Skylights

X

Strengthening building

X

Strongroom

Moved to new position

Installation

Windows

Replacement of damaged window with new window of same type.

  • Construction
  • Replacement of wooden framed with metal
  • Removal of windows and making good the walls
Windows tinting Subsequent treatments Initial treatment
Yard X

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