The IRD recently released an interpretation statement on the topic of R & M, IS 12/03.  Overall there is nothing ground breaking in what it states, with one exception.  It is however a very good summary of the issues to be addressed in considering whether R & M expenditure is deductible or not.  With the removal of depreciation on buildings, there is now even more pressure to claim costs as being deductible.

The one exception is that the IRD has released some guidance on leaky building repair claims which is very welcome and long overdue.

The R&M Deductibility Process

Step 1
  • What is the asset?
  • Need to identify it
  • Is it the whole or a part
Step 2
  • Nature and extent of the work done
  • Repair or replacement, improved materials
  • Part or whole
  • Does it improve the asset
Step 3
  • Specific issues
  • Purchase of dilapidated assets
  • Accumulation of repairs effected at once


While we do not intend to cover the detail of the 53 page paper in full, we consider it is an accurate summary of the law, and how small changes in facts can alter the answer with often two apparently identical cases giving opposing answers/decisions.

Leaky Building Claims

The lack of assistance by the IRD to date has been very concerning.  The paper does however set out some examples which are more than useful in at least confirming that decided case law is still the correct basis to determining the question of deductibility for leaky building claims.

The three examples they set out are as follows:

Example 12 – leaky home repairs (no change in character or substantial reconstruction, replacement or renewal) Cath and Simon own a residential rental property. A few years ago they added a two room extension to the property. The extension has been leaking. The timber framing within the extension is rotten and needs replacing. To make the repairs the cladding and windows need to be removed from the extension and refitted. The cost of the repairs is revenue in nature. The work done to the house does not amount to a reconstruction, replacement or renewal of substantially the whole of the house. Nor do the repairs change the character of the house.


Example 13 – leaky home improvements (change in character) Cath and Simon are unlucky and have discovered that another of the rental properties they own is a “leaky home”. In this case the solution is not as straightforward as in Example 12 above and the remedial work required is extensive. Cath and Simon decide to re-clad all the house’s exterior walls using a superior concrete block construction system rather than the equivalent substitute cladding system. While the concrete block construction system is more expensive, it should be more durable, and require less maintenance. The cost of repairs will be capital expenditure. The work done goes beyond repairing the house and the character of the house is changed. This is the outcome in this case regardless of whether the work done results in the reconstruction, replacement or renewal of the house or substantially the whole of the house.


Example 14 – major repairs to leaky building (substantial reconstruction) Stuart owns a stand-alone single-storey commercial building in Onehunga that he leases to a small manufacturing business. The building has been leaking badly and the walls and timber framing are extensively damaged. To rectify the damage and prevent it recurring, extensive work is undertaken. All the exterior wall cladding is removed and replaced with an equivalent recommended product. Large sections of the buildings framing are  replaced with treated timber.  Also, damaged sections of the floor are replaced.  New flashings are installed around the windows, and portions of the interior walls are relined.  The cost of the work done to the building is significant.  The cost is capital expenditure.  This is because the remedial work done is so extensive it has resulted in the reconstruction of substantially the whole of the building.

In summary therefore for a rental asset:

1. If the repairs are to make good the leaky building issues, but not to improve the building, then it will be a deductible repair.

2. If there are new or better components (eg double glazing over single, additional rooms added), there will be capital costs.

3. If the repair is so extensive that the asset is significantly replaced, even if not improved, this will be capital as it is no longer a repair but a replacement.

As always it will be a question of degree, but at least we have some points to measure it against.

Refer – key word IS 12/03