Finalised guidance on repairs and maintenance

By Angus Isherwood, Amy Sexton & Robyn Walker

Earlier this month, Inland Revenue finalised their guidance on the general principles of deductibility of repairs and maintenance expenditure, following on from the draft guidance released in November last year. Overall, the principles remain largely unchanged from the draft version and our November 2025 Tax Alert article covers key takeaways from the draft guidance when considering whether expenditure is capital or revenue. The focus of this article is on the minor tweaks in the finalised Interpretation Statement.

Capital v revenue 101

As a brief reminder, the capital limitation denies a deduction for an amount of expenditure to the extent to which it is of a capital nature. Presuming the general permission has been satisfied, expenditure on repairs and maintenance is of a revenue nature and therefore deductible, if (1) it does not reconstruct, replace or renew the whole of the asset and (2) does not change the asset’s character. Otherwise, the expenditure is of a capital nature and not immediately deductible. Capital costs may be deductible over time as depreciation deductions, meaning the analysis is particularly important in relation to buildings which have a 0% depreciation rate.

Changes in the final guidance  

What does “significant” expenditure mean?

Generally, the greater the expenditure on repair, the more likely it is to be considered of a capital nature. In the finalised guidelines Inland Revenue has provided greater clarity that “significant” expenditure in the context of an asset’s improvement means significant relative to the asset’s value, rather than in absolute terms. However, the Commissioner noted that cost alone is not a reliable indicator of the nature of expenditure. Repairs that incur substantial costs are not necessarily of a capital nature, provided they do not change the property’s character.

The nature and extent of the work done to the asset

The question on how to determine the nature and extent of work done to an asset was illustrated in the draft guidance with a number of examples, include two involving roof repairs which cast doubt over the material difference between revenue and capital expenditure.

The two examples given were as follows:

• Example 12: The roofing of a lean-to garage attached to a property has a cement-based corrugated roofing sheets that has cracked and started leaking. The original material is not available, so the property owner opts to use a readily available steel roofing material that is pre-painted and requires less maintenance. The cost of replacing the garage roof is revenue in nature, as the use of the different material is not extensive, does not result in a reconstruction, replacement or renewal and does not improve the property beyond restoring the garage’s functionality.
• Example 13: An entire property is covered by the same material as Example 12 which has cracked and started leaking. Again the original material is not available. The property owner uses a more superior material which is pre-painted and more durable as it is the entire roof over all key living areas. In this case, the work done on the property has gone beyond the use of an equivalent material to affect a repair: the property’s character has been changed, and therefore the cost of the work is capital in nature.

The distinction between the two examples was somewhat unclear.

In the final guidance, the Commissioner has amended Example 13 to make clear that the property owner had the option of choosing a material of similar quality (as in Example 12) but instead opted for a superior material. Therefore, repairs are capital in nature if the property owner has the choice of using a different, equivalent material but instead uses a higher quality material to improve the property.

A new example (Example 14) has been added to clarify that replacing a property’s entire roof does not automatically make the expenditure capital:

• A property owner is advised by their building contractor that piecemeal repairs are unlikely to fix their roof which has been leaking for years. The property owner replaces the roof in its entirety, using a material which is equivalent to the original. The cost of the work undertaken is revenue in nature.

What about leaky buildings?

Inland Revenue’s view is that expenditure on remedial work for leaky buildings is highly likely to be of a capital nature, given the property’s character frequently must be changed to solve its inherent defect. If the building is improved beyond its original defective position, then the work is not a repair. The cause of the defect may be relevant; however, the Commissioner’s focus is on the work that is carried out.

With that said, there is limited scope for remedial work to be deductible, where both the nature and extent of the work is minor, and the building’s character does not change. However, this is a narrow exception, and property owners should expect most remedial work to leaky buildings to be non-deductible. This includes situations where work is only done on parts of the building.

Acknowledging the likely heightened interest in this issue, Inland Revenue have produced a new leaky buildings fact sheet to accompany the finalised statement, which summarises how the repairs and maintenance principles apply to leaky buildings.  

Don’t forget about Investment Boost

While outside the scope of the guidance, Inland Revenue has made explicit reference to the availability of the Investment Boost scheme for depreciable, non-residential property, which may allow for a one-off 20% deduction of capital expenditure used to improve property, notwithstanding the current 0% depreciation rate available for buildings. The Investment Boost applies to new depreciable assets that first became available for use on or after 22 May 2025.

In light of the complexities in this area, we recommend reaching out to your usual Deloitte tax advisor the next time you undertake work on an asset or if you would like to find out more about Investment Boost.