How healthy is your tax compliance for your rental property?
Tax Alert - March 2020
By Robyn Walker & Blake Hawes
For those with rental properties there have been a number of regulatory changes impacting on landlords, most notably is the introduction of “Healthy Homes Standards” (“HHS”) and the introduction of loss ring-fencing rules from 1 April 2019. In this article we provide an overview of how tax rules apply to landlords complying with HHS and provide a reminder of how the loss ring-fencing rules apply as landlords prepare to file their first returns under the new rules.
Healthy Home Standards
Since 1 July 2019, residential rental property owners have been required to make sure their properties meet certain minimum standards for insulation and smoke alarms. In addition the HHS require all rental homes to comply with specific regulations regarding heating, ventilation, moisture ingress & drainage and draught stopping by either 2021 or 2024 (depending on tenancy circumstances).
In recognition that landlords are likely to be incurring expenditure on satisfying the HHS’s, Inland Revenue has released some draft guidance in the form of “QB 10/XX Can owners of existing residential rental properties claim deductions for costs incurred to meet Healthy Homes standards?” (“the draft QWBA”).
The draft QWBA outlines the deductibility (or otherwise) of the costs incurred by landlords in complying with HHS. It provides some general rules for determining the deductibility of costs, considering established principles for determining when something forms part of a building and the tax treatment of repairs and maintenance. Most of the conclusions reached in the draft QWBA would probably not come as a surprise to those familiar with these tax concepts, but for landlords who are less familiar with tax rules there may be a nasty surprise that no deductions are available for certain costs incurred under the HHS’s.
There are two main questions for landlords to consider:
1. Is the expenditure on something which is an integral part of and embedded within the building? If so, it forms part of the building and will be depreciable at the rate of 0% (i.e. no deductions are available).
2. Is the HHS expenditure a new item or a repair of something existing (i.e. topping up existing ceiling insulation)? If the expenditure is to bring previous parts of the building back up standard, then potentially this will be a deductible repair.
The draft QWBA provides the following conclusions (replicated direct from the draft QWBA):
Costs of a revenue nature are generally deductible in the income year they are incurred and these may include the costs of:
• repairing items that would otherwise meet the standards if operational or in a reasonable condition;
• minor additions or alterations that do not change the character of the building, such as:
· some costs of meeting the draught-stopping standards;
· making mechanical ventilation systems compliant;
· installing battery-powered smoke alarms;
· some costs of meeting the insulation standard; and
· some costs of meeting the moisture ingress and drainage standard.
• replacing items where they have previously been treated as part of the building; and
• recordkeeping and providing information in tenancy agreements.
Capital costs will generally result in a deduction for a depreciation loss unless they are for something that is part of the residential rental building. The
cost of items that are part of the building are added to the building’s cost
and depreciated at the same rate as the building. Generally, this is zero percent.
Items that are likely to be part of the building include:
• wired-in or battery-powered smoke alarms;
• ducted or multi-unit heat pumps;
• flued fires (wood or gas);
• new or replacement openable windows;
• new exterior doors;
• most extractor fans or rangehoods;
• ground moisture barriers;
• stormwater drainage, gutters and downpipes; and
• underfloor vents.
Capital costs for some items acquired that are not part of the building will be either:
• depreciated over multiple income years using a rate set out in Depreciation Determination DEP80 for assets of that type; or
• depreciated at a rate of 100% in the income year the expenditure is incurred if the item is a “low-value asset” (generally, where the cost is $500 or less). Items able to be depreciated include:
• electric panel heaters (67% DV or SL);
• some heat pumps (eg, single-split type) (20% DV or 13.5% SL); and
• through-window extractor fans, window stays, door openers and stops, external door draught excluders and devices for blocking fireplaces or chimneys (40% DV or 30% SL).
For landlords, it will be important to carefully consider each type of expenditure and whether it will be deductible or depreciable. Submissions are being taken on the draft QWBA until 10 April; Deloitte will be making a submission so please contact us if you have any thoughts.
Reminder: Residential Rental Loss Ring-Fencing
From 1 April 2019 the residential rental loss ring-fencing rules took effect, as we approach 31 March 2020, landlords will find out what the rules mean for their tax positions. As set out in our July 2019 Tax Alert, these rules ensure that unless certain criteria are met, landlords are no longer able to offset losses from rental properties against other sources of income (e.g. salary and wages or investment income). When preparing a tax return for the year ended 31 March 2020, landlords will need to make adecision as to whether to aggregate properties into a portfolio (with offsetting available between properties) or to treat each residential rental property separately.
For more information about any of these changes please contact your usual Deloitte advisor.
March 2020 Tax Alert contents
- GST issues paper proposes some much needed R&M to the GST Act
- Another year over, and a new year just begins
- How healthy is your tax compliance for your rental property?
- OECD guidance on financial transactions finalised
- Update on OECD Base Erosion and Profit Shifting measures
- Snapshot of recent developments
- Deloitte Tax Calendar - Last Call