Insulating your rental: tax deductible? Maybe not

The new insulation requirements apply to social housing from 1 July 2016 and all other rentals from 1 July 2019. Landlords must include in all tenancy agreements from 1 July 2016 a declaration of the level of insulation underfloor, in walls and in the ceiling, and all insulation installed from 1 July 2016 must be to the latest 2008 standards.

The question of whether a cost is deductible maintenance or a non-deductible  capital improvement is often a grey area. The tax department's typical response is to simply say "we consider every case on its merits"

There is however a form of analysis that does

assist. It goes like this:

Step 1. Identify the asset.

Step 2. Consider the nature and extent of work to be done.

Step 3. Consider the project as a whole.

Step 4. Does the work go beyond remedying fair wear and tear?

So, using a retrofit insulation project as an example, where does this lead us on the deductibility question?

Firstly, in the context of insulation the expenditure does not create an asset in its own right. The insulation forms no useful purpose unless it is installed in a building. The building is therefore the asset - not the insulation itself. So far so good.

Secondly, consider the nature and extent of the work. Here things get a bit trickier; are we just going to put insulation in the ceiling or are we going under the floor as well? Doing the minimum would still leave us confident of an increase in the building's performance, but if we do the full number we are probably a bit more marginal, in terms of being simply remedial.

Thirdly, consider the whole project. By this I mean, are we just doing an insulation project or is this just a single component of a much larger project to renovate the building? The more that's happening at the time, the more likely IRD would argue the entire project was capital in nature.

 

Fourthly, does it go beyond fair wear and tear? This is the interesting one. Is an uninsulated home in this day and age "fit for purpose"? If the asset is the building and the building is not fit for purpose , is retrofitting with installation just remedial work?

Then the really curly one, was there insulation there before? If there was insulation there before and we are replacing old with new, using a modern alternative we are almost certainly going to be OK on a repairs and maintenance (R & M) claim.

If, however, there was no insulation previously we are still exposed to the prospect of having improved the property rather than repaired it.

So we land back where we started with some uncertainty. At the coalface, some other factors can influence it, for example, how long has the property been owned and rented?  Did/will  the rent increase after the work was done? Did the insured value of the house change after the work? These are all questions IRD can and do ask when auditing a claim like this.

The revenue men cometh

 

For those in the community that are a little slower in declaring their income to the IRD, be warned there are community compliance staff out there.  I’m seeing their results in our community.  This is not a case of gathering millions of dollars from corporates but more a case of encourage those working in a cash economy to come clean.

If you are one of those people it may be time to consider making a full voluntary disclosure.

HAVE WE GOT YOU THINKING?

Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz orshawn@taxman.co.nz

Keep an eye out for August’s article!

TAX DATES TO REMEMBER

  •   7th July. 2016 - Final date for filing your tax return, if you are not linked to a tax agent…
  • 20th July. 2016 - monthly employers PAYE payment…
  • 28th July. 2016 - Bi monthly GST Return for May/Jun 2016…