Private ruling: Construction works
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the work regarded as a deductible repair? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: Repairs Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or • the work is an initial repair. What is an entirety? Determining what is an entirety is a question of fact in each case. Paragraph 38 of the TR 97/23 explains that a property is more likely to be an entirety if: • the property is separately identifiable as a principal item of capital equipment; or • the thing or structure is an integral part, but only a part, of the entire premises and is capable of providing a useful function without regard to any other part of the premises; or • the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or • the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law. A repair does not involve the replacement of the entire thing. The building is a separately identifiable capital item with its own function. As a consequence, it is an entirety in itself and its replacement is a renewal of the entirety. The expenditure is capital in nature and not a deductible repair ( Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). Whilst it is acknowledge that relocating and building a new building may be the best alternative in your situation the fact that some of the original material is being used to build the new building or the fact that the new building will be smaller than the original does not change the nature of the work. Similarly, the quantity of new or second hand materials to be used to reassemble a new building does not change the capital nature of the work. The cost of the new relocated building is regarded as an entirety and therefore capital in nature. Therefore no deduction is allowable for the associated work.

Relevant facts: Entity A uses a building for income producing purposes. | The building is in need of repair and is many years old. The building is leaning badly and some roof beams have recently come off the support posts after a storm. | You are unable to straighten all vertical posts simultaneously. It is also too dangerous to straighten the posts one by one. Disassembly and re-assembly is the only safe option. You need to rebuild the building. | A lot of the timber from the original building is in good condition, and some of the timber is not in good condition. | The building belonged to a relation and is currently located on land registered in another entity's name. This entity does not have the funds to repair the building and the building would simply end up falling down and being burnt. | You wish to preserve the heritage nature of the structure. | Entity A has been the sole or almost exclusive user of the building. | You intend to build a new building that is considerably reduced in size. You will use the good timber and dispose of the timber that is affected by termites. | The new building will be relocated away from its current location as it currently has water draining down underneath it. The new building will be relocated to a better location on entity A's land. | Some sub floor piers may be replaced by brick piers as brick piers do not attract termites. | The design of the building is good and you wish to retain the same design. The floor, wall, subfloor beams, ceiling beams, rafters, ceiling trusses and roofing iron will be the same, but down-sized.