Proposed deduction denial for detailed seismic assessments
Tax Alert - February 2016
On 11 December 2015 Inland Revenue released draft Question We’ve Been Asked PUB00223: Income Tax – Deductibility of Seismic Assessment Costs (“draft QWBA”) for public consultation.
The draft QWBA considers whether the capital limitation denies a deduction for expenditure incurred in obtaining a Detailed Seismic Assessment (“DSA”) on an “earthquake-prone building”. The draft QWBA concludes that the capital limitation applies to deny a deduction for expenditure incurred in obtaining a DSA.
Where a building is identified as being earthquake-prone, a DSA is undertaken to identify specific vulnerabilities and possible ways to mitigate them. The DSA is part of a four step process that seeks to ascertain the nature and scale of seismic strengthening required on certain types of earthquake-prone buildings as a result of city and district councils policies.
Inland Revenue considers that under “general [tax] principles and from a practical and business point of view, the expenditure on obtaining a DSA is calculated to determine the nature, scale and, possibly, an estimate of the costs of the seismic strengthening required on an earthquake-prone building, so it informs the owner’s decision about the best option for the building. It is, therefore, directed to the future preservation or otherwise of an important capital asset, so is capital in nature.”
The draft QWBA then concludes that expenditure on a DSA is not deductible for tax purposes.
Given that most buildings cannot be depreciated, the consequence of DSA expenditure being capital expenditure is that no deduction is available. That is, it is blackhole expenditure.
The draft QWBA will have relevance to could affect landlords, owners of buildings used for their own business and possibly some tenants that may undertake their own DSAs. It will also be relevant for large commercial property owners, insurers, councils and the engineering industry.
A DSA is about determining and assessing options in respect of a building (i.e. whether to strengthen, demolish, sell or do nothing) and may be more akin to being feasibility expenditure (under IS 08/02) and therefore there is an argument this expenditure should be deductible. The draft QWBA puts forward the position that IS 08/02 relates only to the acquisition or development of a new asset, whereas a DSA relates to an existing asset. This is a subtle distinction and on an initial review of IS 08/02 there are arguments to suggest that the scope of IS 08/02 is wider.
Please contact your usual Deloitte adviser for further information.
Tax Alert February 2016 Contents:
- Collective agreements and employee allowances – are they taxable or exempt?
- Implementing changes to transfer pricing documentation arising from BEPS actions
- Taxpayer wins important residency case against Inland Revenue
- Proposed deduction denial for detailed seismic assessments
- Tax treatment of lump sum settlement payments – draft released
- Business Transformation: Inland Revenue needs you!