Governments requirement for Landlords to insulate – Tax Treatment?
From 1 July 2019 landlords are required to have installed under floor and ceiling insultation or risk being fined. Plus, landlords are required to provide an “insulation statement” for all new tenancy agreements. But what’s the tax treatment for this additional cost?
Even though this is being imposed on the landlord this does not turn into a tax deduction windfall for the owner.
Following an approach by The NZ Property Investors Federation to the Inland Revenue this was the reply received:
The tax treatment for additional insulation into a building that is already partially insulated needs to be considered on a case by case basis and made the following points:
Where a building already has insulation and, in order to meet the minimum standards, the owner is required to “top-up” the insulation provided, this “top-up” uses the same or similar standard of material as is already being used, then the “top-up” is likely to be deductible as repairs and maintenance.
If, while doing this “top-up” the owner takes the opportunity to install new insulation into another part of the building (e.g. adds insulation under the floor and the same time as topping up the insulation in the ceiling), the cost of the “top-up” would likely be deductible as repairs and maintenance. However, the new insulation constitutes an improvement and there would be no deduction allowed for the cost of installing the new material.
If a building owner elects to use an improved standard of insulation – say to change from “Batts” to a blanket type of insulation – then it is possible the new insulation in the ceiling will not be a repair but a new asset and part of the building. However, if the insulation initially used in the ceiling was no longer available, and was topped up with material that is reasonably similar (or a more modern equivalent), then perhaps the “top-up” may be likely regarded as R&M.
In summary, each landlord needs to carefully consider exactly what they are doing with each of their properties. It’s each landlord’s responsibility to clearly communicate with their accountant whether they are simply replacing or virtually replacing because the old stuff isn’t around any longer, or is this a significant improvement on the current status. The former can be treated as repairs and maintenance, but the later cannot.