NZPIF executive officer Andrew King debates the tax deductibility of insulation expenses with the IRD.
1 March 2016
Insulating rental proeprties becomes compulsory in July and the NZPIF believe the cost of insulation should be tax deductible. In order to confirm this, last year the NZPIF requested clarification from the IRD.
Our reasoning is that once compulsory, a rental property owner would have to install insulation in order to continue renting the property. Without insulation, you couldn't continue to receive rental revenue for the property, therefore it is a revenue expense.
Unfortunately, the reply was that new insulation is still considered a capital expense and therefore not deductible. They added that 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. If 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 at 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 – for example, 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 repairs and maintenance.
The NZPIF disagrees with the IRD's interpretation and will approach the Government and other political parties to request that new insulation be tax deductible.
Some parties already have this as part of their housing and tax policy.
Making insulation tax deductible will reduce the cost of insulating rental properties and lower the need for higher rental prices. This will save the Government funds in two ways. It will reduce increases in the accommodation supplement and decrease health spending, as increases in the level of insulation will reduce hospital admissions.
It is clear taxpayers will benefit from rental properties being insulated and making the cost of the insulation tax deductible allows Government to contribute towards the savings they will achieve. It is a highly reasonable request, especially since the withdrawal of depreciation deductions, and we look forward to discussing the matter with the Government and various political parties.