Work­ing out what’s de­ductible

CHB Mail - - Tuki Talk - BY RACHEL BASHNICK As­so­ciate Prin­ci­pal — Busi­ness Ad­vi­sory Crowe Hor­wath

A com­mon ques­tion from prop­erty in­vestors is whether ex­pen­di­ture on main­tain­ing their prop­erty will be tax de­ductible. In most cases the an­swer is not clear cut.

The main is­sue is de­ter­min­ing whether the ex­pen­di­ture has re­stored the prop­erty or spe­cific as­set to its orig­i­nal con­di­tion or if it has been en­hanced and adds to the cap­i­tal value.

This is an im­por­tant dis­tinc­tion as the tax­payer will ei­ther gain an im­me­di­ate tax de­duc­tion for the full amount, a de­pre­ci­a­tion de­duc­tion each year over the life of the as­set or no de­duc­tion at all.

The courts have recog­nised that this is an area fraught with prob­lems and have de­vel­oped var­i­ous tests to help tax pay­ers de­ter­mine the cor­rect tax treat­ment.

An­swer­ing the fol­low­ing ques­tions will help clar­ify if the ex­pen­di­ture is gen­eral re­pairs/ main­te­nance or cap­i­tal in na­ture:

■ What is the prin­ci­pal rea­son for the ex­pen­di­ture? Has some­thing bro­ken or is an as­set be­ing ac­quired?

■ Is the ex­pen­di­ture re­cur­rent? Reg­u­lar ex­pen­di­ture sug­gests main­te­nance and likely de­ductible whereas cap­i­tal tends to be one off and work of a rea­son­able scale.

■ Does the ex­pen­di­ture cre­ate a sep­a­rate iden­ti­fi­able as­set?

■ Does the ex­pen­di­ture cre­ate an en­dur­ing ben­e­fit?

■ Is it funded by fixed or cir­cu­lat­ing cap­i­tal? Projects funded with long-term debt tend to be cap­i­tal due to the size and scale of the project.

Other in­di­ca­tors of cap­i­tal ex­pen­di­ture in­clude:

■ The re­con­struc­tion, re­place­ment or re­newal of the as­set or sub­stan­tially all of it.

■ A change to the as­sets char­ac­ter, func­tion­al­ity or an im­prove­ment to the as­set.

These ex­am­ples il­lus­trate how the above tests can be ap­plied.

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