Repairs & Maintenance on Business Assets: Capital or Revenue? 

 
Grange Associates Ltd - 6 September 2012

If you are looking at undertaking Repairs & Maintenance (R&M), renovations, restorations, or other improvements to any business assets, consideration should be given to the deducibility of the costs incurred. 

Expenses Under $500

Any R&M or fixed assets purchased for less than $500 can be claimed as an immediate deduction and do not need to be capitalised.

Two Step Test

The IRD and the courts have developed a two step approach to help identify whether R&M expenditure is capital or revenue in nature.  It should be kept in mind however, that determining whether R&M expenditure is capital or revenue will depend on the specific facts each time.

Step One: Identify the asset being worked on

This is to assess whether work undertaken is of a capital or revenue nature in the context of the asset identified.

For example, a courier driver needs to replace the engine in his van.  In this case, although the entire engine is being replaced, the engine is NOT the asset, rather the van is.

The courier driver also owns a trailer he uses for large deliveries.  Over time the deck of the trailer has rusted and needs replacing.  In this case, the trailer is the asset being repaired as the deck is not a separate component.

Step Two: What is the nature and extent of the work being done?

Generally, the cost of maintaining or repairing an asset to restore it to its original condition would be deductible as R&M expenditure.

In contrast, if the work results in the reconstruction, renewal or replacement of the asset, or substantially the whole of the asset, the cost of that work will be capital expenditure.  We would consider there to be a high threshold for work to be considered capital under this category.

Similarly, if you are carrying out work which significantly improves the asset beyond its original state, or changes the character of the asset, it will not be considered R&M, but a capital improvement.

So, using our courier driver example above, if he replaces the engine with a similar reconditioned engine, the costs of the replacement engine and its installation will be deductible as R&M expenditure.  The work is only repairing the asset to its original condition, with no significant improvement or change to the vehicle.

However, if he chose to replace the engine with a significantly more powerful engine the work would then be capital expenditure.  The more powerful engine improves the van beyond its original condition and hence must be treated as capital.

Using our above example of the trailer, if the deck is replaced with the same or similar material, the expenditure will be deductible as R&M.  However, if the courier driver then decided to also fit a cage onto the sides of the trailer to enable him to fit more deliveries, this would be capital expenditure as it changes the character of the trailer.

Obviously, most R&M work is not quite as black and white as our examples and will need to be looked at on a case by case basis to determine deductibility, but it is useful to consider them before carrying out any work as they may influence what type of work you carry out & how you choose to do it.

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