ATO ID 2003/222: Repairs: replacement of kitchen cupboards in a rental property
Date of decision: 24 December 2002
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Can the taxpayer deduct expenditure on the replacement of kitchen cupboards installed in a rental property as repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The taxpayer cannot deduct the expenditure as repairs under section 25-10 of the ITAA 1997 because it is capital in nature.

Facts
The taxpayer has owned and rented a residential property for many years. While the property was tenanted, the taxpayer replaced the old kitchen fittings, including the cupboards. The old cupboards had deteriorated through water damage and wear and tear. The new fittings are of a similar size, design and quality as the originals. The new cupboards are of the same type and standard of material (or the modern equivalent of that material) as the old ones. The layout and design of the kitchen did not alter substantially from that of the original. The differences are:

Reasons for decision
Summary: Broadly speaking, section 25-10 of the ITAA 1997 allows a deduction for expenditure on repairs to income producing premises and depreciating assets provided the expenditure is not capital in nature. On the facts provided, it is accepted that the replacement of the cupboards did not result in a significant improvement in the efficiency or function of the kitchen. However, if the cupboards are a separately identifiable thing representing an entirety in themselves and the expenditure on replacing the kitchen cupboards results in an improvement or a renewal or reconstruction of an entirety, the expenditure is not a repair but is capital in nature (Taxation Ruling TR 97/23). In Lindsay v Federal Commissioner of Taxation (1961) 106 CLR 377; [1961] HCA 93, the High Court (Kitto J) held that expenditure incurred to renew a slipway was a renewal of an entirety and was not deductible as a repair under section 53 of the Income Tax Assessment Act 1936 (which was rewritten as section 25-10 of the ITAA 1997). This conclusion was drawn on the basis that his Honour considered the slipway to be a separately identifiable capital item, maintaining its own function. Substantially the whole of the old slipway had been demolished and replaced by a new slipway, comprising all new components and was a renewal of a separately identifiable item and not a repair. These principles equally apply here. The kitchen cupboards are separately identifiable capital items with their own function and are, therefore, an entirety in themselves. Their replacement is a renewal of an entirety and the expenditure is not deductible as a repair under section 25-10 of the ITAA 1997. The expenditure is capital in nature.

Legislative references: Income Tax Assessment Act 1936 section 53
Case references: Lindsay v Federal Commissioner of Taxation (1961) 106 CLR 377 [1961] HCA 93
Related public rulings and determinations: Taxation Ruling TR 97/23
Related ATO interpretative decisions: ATO ID 2003/223
Subject references: Repairs in entirety Rental property