It’s the small questions that crop up over and over
It’s the small questions that crop up over and over
It’s fair to say most landlords will prick up their ears at the suggestion of a tax deductions on offer. If the government simply asked the IR to confirm the tax treatment of retrofitted insulation and confirmed its deductibility I’m sure many landlords would willingly make the spend, subsidy or not.
So why is the deductibility question difficult?
The question of whether a cost is deductible maintenance or a non-deductible capital improvement is often a grey area. The tax departments typical response is to simply say “we consider every case on its merits” which doesn’t assist much!
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 more tricky, are we just going to put insulation in the ceiling or are we going under the floor as well? If we do the walls we have a greater cost and task because the gib needs to be penetrated and repaired and a paint job done at the end. So probably doing the minimum would still leave us confident but if we do a full number we are probably a bit more marginal.
Thirdly, consider the whole project. By this I mean, are we just doing an insulation project or is this just a single component or a much larger project to renovate the building. Our chances are greater of arguing for a deduction if we are simply doing the insulation project. The more that’s happening at the time, the more likely IR 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 if uninsulated is dealing with the installation just redial 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 an 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, perhaps then not surprising that the IR’s stock response is “we consider each case on its merits”.
At the coal face, some other factors can influence the call based on, how long has the property been owned and rented? Did the rent increase after the work was done, did the insured value of the house after after the work. These are all questions IR can and do ask when auditing a claim like this.
Any accountant worth more than peanuts, has years of experience and knows his job. So when you are given advice by a professional that goes against what your mates in the pub have said, or not what you wanted to hear. Just stop for a few moments and think do you want to be on the wrong side of IR.
Be warned
To the observant you’ll note I have a new set of wheels, this now necessitates me using the pedestrian crossing on the main road opposite the shops. It's amazing how many motorist don't stop for me waiting at the edge of crossing,
I have a phone with a camera in it and * 555 is programed into my phone. In the coming months I will have a vehicle camera mounted on the chair recording at all times.
HAVE WE GOT YOU THINKING?
Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz
Keep an eye out for August’s article
TAX DATES TO REMEMBER
- 7th July. 2018 - Final Date for Filing your Income Tax Return for taxpayers who are not linked to a Tax Agent/Accountant...
- 20th July. 2018 - monthly employers PAYE payment…
- 28th July. 2018 - Bi monthly GST Return for Jan/Feb 2018…