Due to insulation becoming compulsory in July, the NZPIF believe that the cost of the insulation should be tax deductible. To confirm this, last year the NZPIF requested clarification from the IRD.
Our reasoning was 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 was 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, 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 and 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 – say 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 R&M.
The NZPIF disagrees with the IRD's interpretation and will approach 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. NZ First's tax policy states; "Owners of rental houses could invest in specified qualifying home improvements and be able to expense them for income tax purposes in the year in which the expense is incurred, including home insulation, solar heating, heat pumps, HRV heating systems, wood pellet and other approved burners, earthquake strengthening, fire, food and other disaster protection".
Making insulation tax deductible will reduce the cost of insulating rental properties and lower the need for higher rental prices. This will save Government funds in two ways. It will reduce increases in the accommodation supplement and decrease health spending as increases in the level of insulation reduce hospital admissions.
It is clear that 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 Government and various political parties.