Deductibility of Healthy Homes costs
If you are an owner of a residential property, you will be familiar with the Healthy Homes Standards that were introduced on 1 July 2019. The standards set out the minimum requirements all landlords are required to comply with.
Examples of the mandatory requirements include fixed heaters in the main living room, smoke alarms, ceiling and underfloor insulation and ground moisture barriers for some properties.
For older homes, the costs of bringing a residential rental up to the standard required could be substantial.
Inland Revenue (IRD) recently released QWBA 20/01, which provides guidance on the deductibility of the costs incurred to meet the Healthy Homes Standards. To summarise, the statement broadly classifies such expenditure into three categories:
• revenue expenditure that is immediately deductible,
• capital expenditure that forms part of the building and is therefore unable to be deducted at all because the depreciation rate for residential buildings is 0%, and
• capital expenditure that does not form part of the building and is therefore likely to be depreciable.
The Commissioner has stated that expenditure will be capital if the work results in the reconstruction, replacement or renewal of the whole asset or substantially the whole asset, or goes over and above making good wear and tear and changes the character of the asset beyond a repair.
Conversely, expenditure that does not meet this definition will be revenue in nature and immediately deductible.