What was initially intended as minor repairs to fix leaks at a Tauranga residential rental grew to almost a complete rebuild with costs totalling some $365,000 dissallowed as a tax expense. Costs were a capital expense; not deductible against rental income.
The High Court was told Ella and Gavin Lawrence purchased a Tauranga property in 2014, using it immediately as a residential rental. Shortly after, their property manager advised of leaks in the kitchen.
Investigations identified water ingress from rusted internal guttering with potential blockages from guttering elsewhere. The house was constructed in the 1980s.
What started out as a minor repair grew over a five year period to major alterations: internal guttering sitting behind fascia board was replaced with external guttering; the roof was replaced and the roofline altered to create an overhang at exposed ends; previous exterior which had cladding affixed directly to timber framing was replaced by new exterior cladding with addition of a cavity wall; double-glazed windows replaced single-glazing; replacement wooden decks were built; and stormwater drainage improved.
This went beyond repairs. It amounted to a reconstruction, substantially renewing the house, Justice Andrew ruled.
As a capital improvement, the cost was not an expense deductible against rental income.
The disputed remediation costs became an issue after a 2021 Inland Revenue audit of the Lawrences’ tax returns filed for the previous four years.
Lawrence v. Inland Revenue – High Court (23.04.24)
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