Deductibility of mandatory insulation of residential properties

Mandatory
With effect from 1 July 2019, all tenanted homes are required to be insulated. Landlords must insulate by then. If not then tenants have grounds to take legal action against the landlords.
Question
We have been getting lots of questions about whether the cost of insulating a rental property is tax deductible or whether it is non-deductible capital expenditure and if non-deductible whether its depreciable! So we thought it would be helpful to clarify.
Capital vs non-capital (revenue)
Generally speaking, capital expenditure refers to expenses over $500 that results in "improvements" to a property. "Improvements" generally adds "functionality" (e.g a new room added or new door installed where there was none or building a deck where there was none) On the other hand, revenue expenditure is the type of work that restores a property to its original condition like a new paint, repairing an existing deck.
Bearing this in mind, how the cost of insulating a rental property is treated will depend on whether it is considered to be a repair or an improvement. The Commissioner of Inland Revenue discusses the treatment of expenditure on insulating residential rental properties in Interpretation Statement 12/03 (Income Tax Act 2007, ss DA 1, DA 2(1); Inland Revenue Interpretation Statement IS 12/03 Income Tax - Deductibility of Repairs and Maintenance Expenditure - General Principles, 29 June 2012). In the statement, the Commissioner concludes that:

• Expenditure on installing insulation in a property that has never been insulated is non-deductible capital expenditure, as the expenditure results in an improvement to the property and can’t be considered a repair. This expenditure cannot be depreciated either - just like painting. It can be argued that applying 10 coats of a particular paint to a brand new home is equivalent to insulating - its still non-depreciable and non-deductible!
• However, expenditure on replacing or topping up insulation that has deteriorated and is no longer effective is a deductible expense because the expenditure simply restores the property to its former condition.
• If the owner takes the opportunity to replace the whole of insulation - that will be considered an improvement and not a repair!

The fact that the individual owns numerous properties does not alter the treatment of the expenditure. Whether the expenditure on insulation is deductible or not is determined by whether it restores or improves a particular property.
If you are not sure about whether or not to claim the cost of insulation as an expense, please contact your Advisor at Core Business Services, Chartered Accountants at 0211 00 66 11 or [email protected]

Disclaimer
The above publication discusses income tax & other issues generally and is not intended to be specific tax or other advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.