Is Asbestos Removal Tax Deductible in NZ? Here's What You Need to Know

A commercial landlord company is asked by its tenant to remove asbestos as a condition for renewing the lease. The big question is — can the cost of asbestos removal be claimed as a tax deduction?

The Short Answer:

It depends on the specific circumstances of the work, but in some cases, yes, the cost can be considered deductible as revenue expenditure rather than capital expenditure.

Question 

A company owns a commercial building which is leased to a tenant. The tenant and landlord company are not associated.

The tenant wishes to undertake a refurbishment of the interior of the building and extend the lease term on the building. However, a condition of the lease extension is that the company removes asbestos from the building.

Is the cost of removing the asbestos deductible to the landlord company? 

Answer

A person is allowed a deduction for an amount of expenditure (including a depreciation loss), to the extent to which the expenditure or loss is incurred by the person in deriving assessable income or in the course of carrying on a business for the purpose of deriving their assessable income. This is called the "general permission".

Expenditure on the maintenance or repair of a capital asset which is used to derive assessable income can be expected to satisfy the general permission.  However, the capital limitation denies a deduction for expenditure of a capital nature.

Inland Revenue provides guidance on the deductibility of repairs and maintenance expenditure in IS 12/03, "Income tax — deductibility of repairs and maintenance expenditure — general principles".

IS 12/03 concludes that if the work done to the asset results in the reconstruction, replacement, or renewal of the asset, or substantially the whole of the asset, the cost of that work will be capital expenditure. Expenditure incurred to repair or maintain the asset, over and above making good wear and tear, that has the effect of changing the character of the asset will also be capital expenditure. Expenditure incurred to repair or maintain the asset without replacing, reconstructing, or renewing the asset, or substantially the whole of the asset, or without changing its character is on revenue account. 

Regarding the nature of the work done, the use of new materials in completing the work does not necessarily mean that the asset is improved. However, where different materials are used and as a result the asset is more advantageous or performs or functions better or differently than it did previously, that may indicate a change in the character of the asset. Where a decision is made to use better materials instead of the same or equivalent materials a change in the character of the asset will result and the cost of the work done will be capital expenditure.

However, in example 11 of IS 12/03, which involves the removal and replacement of an asbestos roof, the Commissioner comments: 

"It is no longer appropriate to use asbestos as a roofing material, so the roof of the lean-to is replaced with a comparable pre-painted steel roofing product. The cost of replacing the garage roof is revenue in nature. In this case the work done does not change the character of the asset. This is even though a newer, more modern material was used. The roofing material selected reflects current building practices, was an equivalent product and did not improve the lean-to beyond restoring it to its original condition. Nor did the work result in a reconstruction, replacement, or renewal of substantially the whole of the house."

Whether the cost of removing the asbestos is deductible to the company will depend on the exact background facts and will require an assessment of the nature of the work carried out. However, based on the Inland Revenue guidance, along with an explicit demand from the tenant to remove asbestos in order to extend the lease term, there may be an argument that any repair work needed will be on revenue account and that the associated expenses should be deductible.

Note that Inland Revenue are currently reviewing IS 12/03 as part of its Public Guidance Work Programme.

References

Income Tax Act 2007, ss DA 1, DA 2.

IS 12/03, "Income tax – deductibility of repairs and maintenance expenditure – general principles", June 2012.

Source: CCH Question of the Week.