Q. We signed up for a house and land package and were supposed to be getting title this month. However, we have just been told an electrical kiosk will be put on the property. Because the house needs to be moved 1.5m, they are offering to hide the kiosk with fencing, painting and changing the master bedroom window to a slider with a private patio. Should we be looking for compensation as this could lower the property’s value and make it harder to sell?

A. This situation is not entirely uncommon and is usually provided for in the contract. In many contracts for sale and purchase of land “off the plans” there are provisions that allow the developer to alter the works under contract in certain situations, such as an agreement that allows the developer to alter what has been agreed to give effect to a building consent. It seems likely installation of the electrical kiosk was to give effect to a consent of some variety.

Your options depend on the terms of the contract you signed, as well as discussions (if any) had with the developer leading up to your entry into the contract (to determine whether you have a claim for misrepresentation and/or a breach of the Fair Trading Act 1986).

We suggest getting your lawyer to review the contract. It may provide for a method by which the purchase price could be reduced to reflect the decreased value, or this kind of situation. Some “off the plan” contracts provide that a purchaser will not be entitled to make a claim for compensation if variations are made that differ from specifications. If your lawyer determines you may be able to claim, you could get a valuer to assess whether the kiosk has negatively affected the value of the property and seek price deduction.
- Shane Campbell

Q. IRD questioned my expenses for a rental property I own. The answer came back that all was fine except for replacing the floor covering in the conservatory, which cost $1,800. They said it should not be expensed but depreciated, even though I produced the invoice from the supplier. The IRD said the amount seemed a bit large for repairs and maintenance and should be an asset. Should I questionthis further?

A.The IRD’s position is nonsense. The courts have established a two-step process for determining whether a cost is deductible as repairs or non-deductible as a capital improvement. Step one involves identifying the asset being worked on and step two focuses on the nature and extent of the work undertaken. When identifying the asset, the court has adopted the entirety test, which poses these questions:

1. Is the asset complete in and of itself or does it form part of another asset?
2. Is the asset physically or functionally distinct from its wider setting?
3. Is the asset capable of separate operation as an item by itself?

In your case the asset is the building itself. The flooring forms part of the building and has no purpose or function if not attached to the building. When considering the nature and extent of the works, ask whether the work resulted in the reconstruction, replacement or renewal of the asset, or a substantial portion of it? If so, the cost is likely capital in nature.

When viewed through this lens, the $1,800 could not be considered to be of an extent or degree that resulted in reconstruction or renewal of the building itself. The cost is therefore deductible as a repair to the building. As a footnote, arguments like this with IRD are often lost simply because the taxpayer must act with a view to the economic reality of fighting through the disputes process whereas the IRD has no such economic constraint. The battleground is not level.

Your $1,800 deduction is worth $594 of tax, which means there is no budget to engage an accountant to push back on IRD. This is one of the reasons why, after 20 years of leaky buildings, we still haven’t had a precedent-setting tax case on deductibility of remediation of leaky buildings. Instead, we are reliant on cases from the 1900s on issues like whether replacing railway sleepers amounts to repair or improvements to railway assets.

Many accounting firms offer their clients an insurance product called “audit shield” which provides cost cover for professional fees associated with an IRD enquiry and the cost of arguing a point through the dispute process. Your issue is why taxpayers should consider this type of cover.
- Mark Withers

Q. I have a situation with HSBC refinancing. The bank wants to have my partner take on the loan as a joint loan, but the property can stay in my sole name. What does this mean from a tax and ring-fencing point of view?

A.This is an increasingly common occurrence unfortunately and, equally unfortunately, one where there is not necessarily clarity from a tax perspective and certainly no assistance from the IRD at this point on how they would apply the law. In my view, if your partner is named as a co-borrower simply to facilitate the refinance, and you remain solely responsible in practice for paying the mortgage, then to the extent that interest is deductible, you should be entitled to claim it as a deduction against rental income received.

It seems logical to me that the rental income remains your taxable income, and if the arrangement between you and your partner is such that you are the one that bears the cost of the mortgage, despite their presence on the loan agreement as a co-borrower, then it is still a cost associated with the rental activity and, subject to the interest limitation rules, deductible. If this produces a loss, then as you point out, there are ring-fencing rules that mean that loss will be ring-fenced and only able to be offset against future taxable rental profit.
- Matthew Gilligan

Q. I have a five-bedroom house that is let on a room-by-room basis to international students. One of the rooms is occupied by a married couple and the wife is pregnant. The tenants advised that they would like to stay in the house once the baby is born. Obviously having a baby in the house will seriously affect the other tenants in terms of noise and possibly sleep disruption. What is the legal position in this situation?

A.There’s an important case you should be aware of – Rawstorne v Westside Management t/a Quinovic Property Management [2021] NZDC 14114. In this case, the District Court ruled that a landlord’s decision to ask a pregnant tenant to vacate the property due to concerns about the baby exceeding the maximum number of occupants constituted discrimination, and the tenant was awarded damages.

To address this situation practically, start by communicating with your tenants. Explain how having an infant in the house might affect other tenants’ quiet enjoyment, emphasising the provisions of the RTA: “The tenant must not cause or permit any interference with the reasonable peace, comfort, or privacy of any other tenant on the premises.”

Ask the couple how they plan on meeting these requirements once the baby has arrived. Without being insistent, offer to help the tenants find new accommodation more suitable for a young family. If they’ve been good tenants, provide a landlord reference to assist them in securing their next property.
- Ryan Weir

Q. I have recently had some water blasting work completed at my property. To ensure my tenant was not charged for the water use, I requested a water meter reading before the job was carried out. The maintenance worker found a completely corroded water valve on my property’s meter. What are the costs involved in replacing this and are there any risks if I wait to have it fixed?

A.Watercare owns and maintains all water meters, backflow prevention devices, pipes, and other water network assets before a property’s point of supply – this includes the pipe that connects the meter box to the water network and the meter box itself. A landlord has responsibility for maintaining pipes, fittings and devices. This includes the pipe that connects the meter box to the property. The point of supply is defined by Watercare as the outlet of the meter fitting closest to your private pipe. In this instance, as the water valve is part of the meter box and it has been subjected to corrosion over time, it is Watercare’s responsibility to fix the meter. If you use a property management company they should have full access to your Watercare account and can organise the repair for you. For self-managed properties, contact Watercare yourself and request a replacement via watercare.co.nz. Include a photograph in the request for reference and proof of the corrosion. We would recommend you replace the water valve as soon as possible. If you were to have a water leak on your property, maintenance workers would be unable to shut the main water off. Broken water valves are at risk of flooding and water damage.

If a small leak were to occur undetected, over time this can lead to water damages to your property, cause rotting, and result in flooding.
- Eric Hammond

Q. If I bought a house using a second-tier lender and renovated it within a month or two, is it possible to have the property revalued and switched over to a main bank for refinancing? What are the implications – application, fees, etc – if it is possible to do this?

A.Yes, it is possible and we find that many investors use this as a two-step solution. In most cases we see this where the investor doesn’t have sufficient equity to initially fund the purchase through a bank but after the renovation it can fit. The costs will be determined by which non-bank funder is used as their costs can vary, you will have to pay your solicitor twice and may need to pay a broker, potentially, if they are involved as they are likely to have commission clawed back.
– Kris Pedersen