ATO ID 2002/1001: Repairs - Refrigeration unit
Date of decision: 11 October 2002
Year of income: Year ended 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Is a taxpayer entitled to claim a deduction for the cost of replacing the refrigeration unit of a refrigerated milk truck under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) as a repair by replacement of defective subsidiary parts of a whole.

Decision
Yes, the taxpayer is entitled to claim a deduction for repairs under section 25-10 of the ITAA 1997 for the cost of replacing the refrigeration unit of a refrigerated milk truck.

Facts
The taxpayer operates several refrigerated trucks. The taxpayer replaced the refrigeration motor in one of its trucks with a new unit. The new unit performs the same functions as the one it replaces.

Reasons for decision
Summary: Section 25-10 of the ITAA 1997 states that a taxpayer can deduct expenditure they incur for repairs to premises (or part of premises) or a depreciating asset that they held or used solely for the purpose of producing assessable income. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains that the word 'repairs' ordinarily means remedying or making good defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. If however the work done amounts to a renewal of the entirety rather than a replacement of subsidiary parts of a whole then the expenditure is not deductible under section 25-10 of the ITAA 1997 as a repair. Taxation Ruling TR 97/23 states that property is more likely to be an entirety if it is 'a unit of property' as the expression has been used in the income tax law. Whether a thing is a functionally complete unit or simply a component in a larger system which is itself the 'unit of property' is a question of fact and degree which can only be determined in the light of all of the circumstances of a particular case. In Ready Mixed Concrete (Vic) Pty Ltd v. Federal Commissioner of Taxation (1969) 118 CLR 177; [1969] HCA 12; (1969) 1 ATR 123; 69 ATC 4038 it was held that a transit mixer did not form part of a total vehicle comprising the mixer and the truck. The truck was held to be performing the function of delivery. Whereas the mixer performed the function of mixing, as a step in the production of concrete in the condition required for pouring. Similarly the refrigeration truck has two discrete functions (delivery and cold storage). However, unlike the mixer, the refrigeration unit can not be separately identified as having a discrete function. The discrete function of cold storage is shared by both the insulated van and the refrigeration unit and can not be performed until both these parts come together. The replacement refrigeration unit is an integral part of the refrigerated van (which is in turn located on the truck chassis) that is incapable of providing a useful function (cold storage) without the other part of the income producing property and as such is not separately identified in the taxpayer's business as an item of plant. The restoration of the effectiveness of the refrigeration van by replacing the refrigeration unit is therefore a repair and not expenditure of a capital nature. Accordingly, the taxpayer is entitled to claim the cost of replacing the refrigeration unit under section 25-10 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 25-10
Case references: Ready Mixed Concrete (Vic) Pty Ltd v. Federal Commissioner of Taxation (1969) 118 CLR 177 [1969] HCA 12 1 ATR 123 69 ATC 4038
Related public rulings and determinations: Taxation Ruling TR 94/11 | Taxation Ruling TR 97/23
Subject references: Repairs & maintenance expenses Repairs in entirety Depreciation Depreciable plant Decline in value Depreciating asset Acquisition of plant