REPAIRS TO NEWLY ACQUIRED ASSETS: WHAT’S TAX DEDUCTIBLE?

Repairs to newly acquired assets: what’s tax deductible? When acquiring an asset – including rental property – it’s common to incur repair costs to bring it up to a usable standard. But can those costs be claimed? The Inland Revenue Department (IRD) has released updated guidance on the subject, including a “Question We’ve Been Asked” (QWBA) item that clarifies when repair and maintenance (R&M) costs can be deducted and when they are considered capital in nature.

Let’s unpack this guidance and explore how businesses and investors can navigate the rules for claiming deductions on repairs to newly acquired assets.

Capital vs. Revenue Expenditure: The Fundamental Divide

The cornerstone of tax deductibility is the distinction between capital and revenue expenditure.

• Revenue expenditure relates to repairs that restore an asset to its original condition. These costs are typically deductible in the year they are incurred.
• Capital expenditure, on the other hand, includes improvements or enhancements that add to the asset’s value, extend its life, or adapt it to a different use. These are not immediately deductible but may be depreciable over time.

The IRD consistently applies this framework, as reiterated in Interpretation Statement IS 12/03. You can read that guidance here

What Are “Initial Repairs”?

A key concept introduced in the QWBA is that of initial repairs. These are repairs undertaken soon after purchase to make the asset fit for its intended use. IRD treats these as capital costs, because they form part of the process of acquiring a functioning asset.

Example:

You purchase a commercial building and immediately spend $50,000 re-carpeting, fixing the leaking roof, and repainting. Although these might seem like maintenance, if done right after purchase to remedy issues present at the time of acquisition, they are considered initial repairs and are capital in nature.

More details:
https://www.taxtechnical.ird.govt.nz/questions-we-ve-been-asked/repairs-to-recently-acquired-assets

When Are Repairs Deductible?

To be deductible, repairs must meet these conditions:

1. The asset was already in a usable state at the time of acquisition.
2. The repairs were made to fix wear and tear that occurred during the new owner’s period of ownership.
3. They do not significantly improve the asset or alter its use.

This aligns with standard case law principles including Poverty Bay Electric Power Board v CIR [1961] and Case L32 (1989) 11 NZTC 1,190.

An IRD example includes the repair of fencing on a farm, where only sections affected by recent storm damage are repaired—this would generally be deductible.

Identifying the Asset: A Crucial Step

Determining whether a cost is deductible often requires first defining what the asset is. Is it:

• A building as a whole?
• A component (like the roof, HVAC, or plumbing)?
• A bundle of assets forming a larger whole?

This is important because work that constitutes a repair of a component might be deductible, while replacing a substantial portion of the whole asset might be a capital expense.

IRD’s Interpretation Statement IS 12/03 provides practical direction here. It includes tests such as the “entirety principle,” which helps determine whether a component is a separate asset or part of the whole.

Apportioning Mixed Repair Costs

In reality, many repair projects include both deductible and non-deductible elements. Where possible, these should be apportioned, and only the revenue portions claimed.

For example:

If you repaint a building (a deductible repair) but also replace a deteriorated veranda with a new deck (a capital improvement), only the painting costs should be claimed as a deduction.

However, when the revenue component is minor or incidental to the overall capital improvement, the whole cost may be treated as capital. IRD highlights this in several scenarios.

More from IRD’s technical commentary: https://www.taxtechnical.ird.govt.nz/

Timing: How “Recent” Is Too Recent?

The QWBA avoids giving a fixed timeframe for what counts as “recently acquired.” However, the shorter the time between acquisition and repair, the more likely the IRD is to view it as an initial repair.

Factors the IRD considers:

• Was the asset functional and in use before the repairs?
• Was there a documented maintenance schedule?
• Do the repairs relate to defects identified in a pre-purchase inspection?

The IRD takes a facts-and-circumstances approach. This is discussed in IRD’s recent Interpretation Statement IS 12/03; see also this article from Deloitte

Special Cases: Rental Property Repairs

Rental properties often present grey areas. For example:

• Repainting a wall damaged by tenants after purchase may be deductible.
• Replacing outdated carpets in every room to improve rentability is likely capital.

Landlords should maintain clear records, including:

• Date of acquisition
• Property inspection reports
• Tenancy start dates
• Invoices and breakdowns of works done

A guide specific to rental deductions is here:
https://www.ird.govt.nz/property/renting-out-residential-property/deductions-you-can-claim

Repairs vs. Improvements: Common Examples

See also our general guidance here on what can be claimed

What Can You Do To Stay Compliant?

Here are tips to stay on the right side of IRD rules:

1. Keep Detailed Records: Include inspection reports, invoices, and before-and-after photos.
2. Separate Work Types: Break down quotes into repair vs improvement categories.
3. Use Professional Judgment: Consult a tax adviser or accountant early in the process.
4. Understand the Context: The same work may be deductible or not, depending on timing and purpose.

Final Thoughts

The IRD’s recent commentary reinforces a principle that’s been around a long time: not all repairs are created equal. When repairs are made to newly acquired assets, the likelihood of them being capital increases—particularly if they are required to make the asset functional or were foreseeable at purchase time.

Understanding the nuances—such as initial repairs, asset identification, apportionment, and timing—will help businesses and investors make better decisions and avoid costly tax adjustments. As always, seek advice on your situation