Tax Updates: 17 February 2025

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

“Initial” asset repairs likely to be capital

For those of you who have been around for a while, you would already appreciate the potential tax outcome of so-called dilapidation repairs – your client acquired an asset at a discounted price due to its present condition, and post-purchase (relatively soon thereafter), spent money on bringing the asset back to a more suitable state. Such repairs are usually treated as part of the cost of acquisition of the asset. Consequently, they are non-deductible costs (capital as opposed to revenue), but with the amount then added to the actual cost of the asset for determining subsequent depreciation deduction claims.

Well, Inland Revenue (IR) has just issued a draft QWBA titled “Income tax: Can I claim a deduction for expenses I incur on repairing a recently acquired capital asset?” – referenced PUB00459.

To some extent, the question has already been covered in IR’s more detailed interpretation statement (IS) on the general principles surrounding deductibility of repairs and maintenance expenditure, referenced IS 12/03 (a document itself targeted for an update over the coming 12 months). However, it was felt that a separate QWBA was now required, as the Commissioner decided that he has now reached a different conclusion on the relevance of whether the price of the asset was discounted than might be inferred from the current discussion of this question in IS 12/03.

The primary question covered by the QWBA is whether a taxpayer can deduct, for income tax purposes, the amount of expenditure they have incurred to repair a capital asset they have recently acquired so they can use it in their business or income-earning activity. The answer is determined by whether the repairs to the asset would be seen as “initial repairs” – work on the capital asset needed to make it suitable for use as intended.

The QWBA is only a 16-page read, with the last 6 pages comprising examples to illustrate the content. My view on the issue is that you give it your standard sniff test and post a short conversation with your client (who will clearly have a subjective understanding of why the repairs were undertaken), you will have a reasonable idea of whether claiming the expense may create problems for your client down the track, should IR raise their eyebrows at the claim. 
If, however, the sniff test doesn’t work for you, then signalling potential deductibility issues would be if the repair cost:

• is part of the taxpayer acquiring the means of production, establishing or extending a business organisation, or acquiring the implements of work or the enterprise itself;
• is part of the cost of “creating, acquiring or enlarging the permanent… structure of which the income is to be the produce or fruit;”
• alters the framework within which the income-producing activities are for the future to be carried on (with the asset); or,
• is incurred with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.

If you wish to make any submissions regarding the draft QWBA, the closing date is 28 March 2025.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.