Tax Updates: 21 July 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.

QWBA on deductibility of ‘essential initial repairs’

Inland Revenue (IR) has recently released a Questions We’ve Been Asked (QWBA) – “Income tax: Can I claim a deduction for expenses I incur on repairing a recently acquired capital asset?”

The document is referenced QB 25/17 and is a 16-page read. As the introduction suggests, it addresses whether a taxpayer can deduct, for income tax purposes, the amount of expenditure they incurred to repair a capital asset that they recently acquired. The repairs in question are those that are essential for the taxpayer to use the asset in their business or income-earning activity and make it suitable for the taxpayer’s intended long-term use – expenditure referred to in the QWBA as ‘essential initial repairs.’

The QWBA references the decisions of Hallstroms and Nchanga, which, in my view (along with IR’s), provide some useful guidance points to store within your brain. Or for initial consideration, at least, whenever you get asked by your client whether their expenditure is deductible, and you need to apply your mind to the capital/revenue distinction:

• the acquisition of the means of production (capital) and the use of them (revenue); or,

• the reform or more effective establishment of the organisation by which income will be produced (the ‘profit-yielding subject’) (capital) and how that organisation will be used (revenue); or,

• the costs of creating, establishing, acquiring or enlarging the permanent structure of the business (capital) and the costs of using the structure to earn income or of performing the income-earning operations (revenue).

With these three guiding principles on board, it is then time to pause and reflect on what your client’s expenditure was calculated to affect from a practical and business point of view. It is around this point that you start to get a ‘gut feeling’ for how the expenditure should be treated, and then it becomes a question of what, if any, wriggle room you may have with that conclusion. And naturally, and perhaps more importantly, where your client sits on the passive/aggressive scale in terms of the tax position they may wish to take.

To answer the question from the Revenue’s perspective, the QWBA states:

• Expenditure a taxpayer incurs from carrying out repairs on a recently acquired capital asset will be considered essential initial repairs and, as a result, capital in nature where the work was ‘due’ at the time that the taxpayer acquired the asset.

• Repairs will be considered ‘due’ when the repairs are required to restore or maintain the asset’s functional effectiveness, including its ongoing functionality, where this is essential to make the asset suitable for use as intended by the taxpayer. The relevant ‘use’ is the specific manner in which the taxpayer ultimately intends, in the long term, to use the asset in their business or income-earning activity.

Regarding these two identifying factors, it’s important to note that some immediate short-term use of the asset does not prevent subsequent repairs from being considered ‘essential initial repairs,’ and while repair work done shortly after the asset is acquired strongly suggests the repairs were capital in nature, the timing alone is not determinative.

Also, do not overlook the potential issues of the expenditure being considered capital in nature because they don’t satisfy the ‘essential initial repairs’ definition (because it substantially altered, extended, replaced or improved the asset), or because the repairs were part of an overall capital project where all costs are then treated as being capital in nature.

The QWBA concludes with several useful examples to illustrate the commentary.e information provided directly to Inland Revenue (IR) by early child education providers.

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.