Timely revised guidance on deductibility of certain earthquake related costs
Tax Alert - December 2016
By Robyn Walker and Alex Robinson
As much of the country is pulling itself together after being woken in the early hours of 14 November by a strong earthquake, tax is likely to be one of the last things on people’s mind, and rightly so.
However, the financial stress of the aftermath of a big earthquake will be slightly reduced with Inland Revenue issuing a revised draft interpretation stating that in most instances the cost of obtaining a detailed seismic assessment (“DSA”) will be tax deductible. The updated interpretation follows an earlier draft position released by Inland Revenue, which concluded that the cost of undertaking a DSA on a building was capital in nature and therefore not deductible. For more information on Inland Revenue’s original position, please refer to our February 2016 Tax Alert.
During the consultation period, Deloitte and a number of other submitters strongly opposed Inland Revenue’s original position. In Deloitte’s submission, we highlighted that there are a number of reasons why businesses could obtain a DSA, many of which would not result in the undertaking of seismic strengthening work. The updated interpretation provides for a number of instances where Inland Revenue consider that DSA expenditure will be deductible, including:
- When a city or district council has identified a building as potentially earthquake prone (i.e. it has been assessed at less than 34% of the new building standard) – in this instance the expenditure will likely be to determine whether any further action needs to be taken;
- When a building consent is required to alter a building;
- To satisfy existing or potential tenants of a building;
- To get insurance or to reduce insurance premiums;
- To identify potential damage after an earthquake; and
- To evaluate the safety of someone else’s building where the safety of that building may impact on the taxpayer’s business.
The updated interpretation also notes that expenditure on repairs and maintenance on a building, rates and building warrants of fitness are also deductible.
Where a DSA is undertaken as part of a project to seismically strengthen a building or to development or improve a building, Inland Revenue then consider that the DSA expenditure should form part of the project, which would be capital in nature and therefore not deductible.
We consider the conclusions reached in the updated interpretation to be technically correct and are a good result for taxpayers, particularly when many businesses will currently be getting their buildings assessed for damage. Submissions on the revised interpretation closed on 2 December. The statement should be finalised shortly thereafter.
However, DSAs are just one small piece in the bigger picture of tax issues a number of businesses will now need to be thinking about including the following:
- Getting tax payments made on time.
- Whether repairs will be deductible, or whether they improve on what was there before. The inability to claim depreciation on most buildings means it is not possible to claim a deduction for seismic strengthening work.
- The tax treatment of insurance proceeds (including business interruption insurance). Specific tax rules govern when tax needs to be returned on these proceeds.
- If a building is irreparably damaged, whether a loss is available (one of the only instances a loss on disposal of a building is available is if it is rendered useless by a natural disaster).
If you have any questions in relation to the updated interpretation and the deductibility of earthquake related costs, please don’t hesitate in contacting your usual Deloitte advisor.
December 2016 Tax Alert contents
- Timely revised guidance on deductibility of certain earthquake related costs
- Closely held companies bill reported back with significant changes
- Charitable change to the FBT rules? Depends on your facts
- Business tax simplification measures are a step closer
- Calculating “market rental value” on employee accommodation – guidance finally released
- R&D tax credits – our experience to date
- IR’s Operational Guidelines: Pre-Litigation Settlements
- What’s on the Tax Policy Agenda?
- A snapshot of recent developments