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
Step One: Identify the asset being worked
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
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
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.
All information is correct at the date of article
publication. Please note we provide the information as a service only. Accordingly, the contents are
not intended as a substitute for specific professional advice and should not be relied upon for that
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