Tax relief for quake testing; strengthening still a capital cost

The Inland Revenue Department has done an about-turn, releasing a proposal that will allow the cost of detailed seismic assessments to be tax deductible (click here for RadioNZ’s report).

Costs associated with seismic strengthening, including seismic assessments, have typically been treated as a capital cost (with no eligibility for tax relief), on the basis that strengthening works increase the life and enhance the value of the asset (the building). However, in apparent recognition of the fact that owners may carry out seismic assessments for varied reasons – not necessarily with a mind to improving the value of a building – IRD proposes to treat these costs as revenue in nature.

Many landlords will not consider this step far enough – landlords have been pushing for tax relief on the cost of strengthening work for years, arguing that:

  • earthquake strengthening does not always increase the real value for a property owner;
  • there is a wider public benefit in preparing buildings for earthquakes;
  • tax breaks would operate as an incentive for landlords to voluntarily strengthen buildings; and
  • many owners facing mandatory upgrades are struggling with the financial burden to upgrade their buildings within required timeframes.

While the IRD has softened on seismic assessments, broader tax relief remains unlikely. The Government has been steadfast in its position to date, and there are persuasive arguments against allowing tax relief for strengthening works – for example, New Zealand does not have a capital gains tax, so why should capital losses be deducted. Further, market pressure has already incentivised voluntary strengthening in centres such as Wellington, where agents and sophisticated commercial tenants will not entertain buildings with low seismic ratings.

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