Private ruling: Roof works repairs or capital works
Date of advice: 15 November 2021
Published: March 2022
Ruling period: Year ended 30 June XXXX
Date scheme commenced: 1 July XXXX

Ruling: Q1: If the Taxpayer chooses Option 1, is it entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount incurred? | A1: No | Q2: If the answer to question one is no, if the Taxpayer chooses Option 1, is it entitled to a deduction under section 25-10 of the ITAA 1997 for some of the amount incurred? | A2: Yes | Q3: If the Taxpayer chooses Option 2, is it entitled to a deduction under section 25-10 of the ITAA 1997 for the full amount incurred? | A3: No | Q4: If the answer to question three is no, if the Taxpayer chooses Option 2, is it entitled to a deduction under section 25-10 of the ITAA 1997 for some of the amount incurred? | A4: Yes

Relevant facts and circumstances: 1. The Taxpayer purchased an investment property (the premises) on Date X. 2. The premises have been continually leased out to tenants since it was acquired by the Taxpayer. 3. As a result of fault to the roof of the premises some damage to the interior of the building occurred and the Taxpayer commissioned Entity A, to investigate the cause of the damage. Entity A provided a report offering a quote for two solutions, being: • roof remediation works (Option 1); or • full roof replacement (Option 2). 4. A copy of Entity A's report to the Taxpayer which detailed the work that would be undertaken under both options was provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 subsection 25-10(1) | Income Tax Assessment Act 1997 subsection 25-10(2) | Income Tax Assessment Act 1997 subsection 25-10(3)

Reasons for decision: Summary: No. Option 1 will rectify deterioration of the roof that has occurred over the life of the roof and not just for the period in which the Taxpayer owned the premises. The Taxpayer purchased the premises on Date X. The roof was already in the process of deteriorating on Date X, and then continued to deteriorate from Date X onwards, to the point that it now needs the remedial action as recommended by Entity A. As the Taxpayer has only owned the premises since Date X, part of the expense to be incurred will rectify the natural deterioration that existed at Date X, and part of the expense will rectify the natural deterioration that had occurred from Date X onwards. The portion of the expenses incurred that relates to deterioration that has occurred before Date X is an 'initial repair', and initial repairs are expenses that are capital in nature. Subsection 25-10(3) denies a deduction where expenses incurred to repair the premises is capital expenditure. As there is a portion of the expense that may be incurred that is capital in nature, the Taxpayer is ineligible to claim the full Option 1 amount incurred under subsection 25-10(1). | Detailed Reasoning - Detailed reasoning: 9. Section 25-10 of the ITAA 1997 deals with repairs to premises: 25-10(1) You can deduct expenditure you incur for repairs to premises (or part of premises) or a *depreciating asset that you held or used solely for the *purpose of producing assessable income. 25-10(2) If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances. 25-10(3) You cannot deduct capital expenditure under this section. 10. In examining subsection 25-10(1), the Taxpayer has been leasing the whole of the premises out since they were purchased on Date X, i.e. the premises have been held solely to produce assessable income by way of rent since that date. 11. The next step is to determine if all or part of the expenditure incurred under Option 1 is a repair and, if so, whether it is capital expenditure. | Detailed Reasoning - Is the expenditure a repair in the ordinary meaning?: 12. Paragraphs 13 to 16 of Taxation Ruling TR 97/23 Income tax: deductions for repairs set out the Commissioner's view as to the ordinary meaning of repairs: 13. The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of 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. 14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property. 15. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. 16. To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10. 13. With reference to the above paragraphs and the quoted work, it will involve the replacement of corroded metal, making good the deterioration with new metal parts, which is a repair. 14. In respect of the cleaning of other parts, paragraphs 19, 20, 92, 93, 94 and 95 of TR 97/23 set out the Commissioner's views as to maintenance work and whether that maintenance work is a repair: 19. Work done partly to remedy or make good defects, damage or deterioration does not cease to be a repair if it is also done partly - even largely - to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property or in rectifying defects in their very early stages. Repairs are not confined to rectifying defects, damage or deterioration that have already become serious. Work done to property not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10. 20. Some kinds of maintenance work are 'repairs' in terms of section 25-10, for example, painting plant or business premises to rectify existing deterioration and to prevent further deterioration. Other kinds of maintenance work, such as oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, are not 'repairs' in terms of the section. Expenditure on the latter kind of maintenance work may be an allowable deduction under section 8-1. ... 92. Maintenance, as generally understood, includes the prevention of defects, damage or deterioration; a common example is the regular re-painting of business premises. The word 'maintenance' may in some contexts be the same as 'repair', and it may in some contexts have a wider meaning that includes repairing as well as other operations. Some kinds of maintenance work constitute 'repairs' in its context in section 25-10, for example, painting plant or business premises to rectify existing deterioration and to prevent further deterioration. Maintenance done to property that is not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10. 93. In Day v. Harland and Wolff [1953] 2 All ER 387 Pearson J observed at 388: 'So, very broadly speaking, I think that to repair is to remedy defects, but it can also properly include an element of the "stitch in time which saves nine". Work does not cease to be repair work because it is done to a large extent in anticipation of forthcoming defects or in rectification of merely incipient defects, rather than the rectification of defects which have already become serious. Some element of anticipation is included.' (emphasis added) 94. His Honour's statement, by necessary implication, indicates that work done that is only in anticipation of forthcoming defects or deterioration does in fact cease to be repair work. Work done in anticipation of forthcoming defects or deterioration can be considered a 'repair' if it is done in combination with work of rectification: see the BP Oil Refinery (Bulwer Island) Ltd case at 92 ATC 4039; 23 ATR 73. 95. Oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, is not 'repairs' in terms of section 25-10: compare London & North Eastern Ry. Co. v. Berriman [1946] 1 All ER 255 at 267 and the BP Oil Refinery (Bulwer Island) Ltd case. (The cost of these operations may be deductible under section 8-1.) 15. In this instance, two options were provided to remedy the identified defect. 16. Under Option 1 the most severely rust-affected area of the roof will be replaced, while other areas will be cleaned, delaying the costlier Option 2, i.e., the full roof replacement. 17. As outlined in paragraph 92 above, maintenance work can constitute 'repairs', in its context in section 25-10, where painting of business premises is done to prevent further deterioration. In the context of the quoted work, the cleaning is a repair, as it is being done to prevent or slow further deterioration. | Detailed Reasoning - Expenditure on a repair that is capital in nature: 18. In respect of expenditure incurred for repairs that are capital in nature, paragraphs 31 and 32 of TR 97/23 state: 31. Expenditure incurred for repairs is not deductible under section 25-10 if the expenditure is of a capital nature. Subsection 25-10(3) precludes a deduction for capital expenditure. 32. Expenditure for repairs to property is capital expenditure if any of the following subparagraphs applies: (a) The guidelines for distinguishing between capital and revenue outgoings laid down by the courts for the purposes of the forerunners of section 8-1 in such cases as Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; (1938) 5 ATD 87 and Hallstrom's Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190 indicate that the expenditure is incurred in establishing, replacing or enlarging the profit-yielding (i.e., business) structure rather being a working or operating expense (see also paragraphs 111 and 134 of this Ruling). (b) The expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety (see paragraph 114 of this Ruling for what is meant by an 'entirety'). The application of this distinction depends very much on what, in the circumstances of the case, is properly considered to be the relevant entirety (see also paragraph 115 of this Ruling). (c) If property bought for use as a capital asset in the buyer's business is not in good order and suitable for use in the way intended, expenditure incurred in putting it in order suitable for use is part of the cost of its acquisition and is of a capital nature (see also paragraphs 59 to 66 and 125 to 140 of this Ruling). 19. TR 97/23 then expands on these three subparagraphs by looking at repairs under the following headings. • distinction between repair and either renewal or reconstruction - what is meant by an entirety • distinction between a repair and an improvement • use of different materials • repairs done at the same time as improvements • expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs). Distinction between repair and either renewal or reconstruction - what is meant by an entirety 20. Paragraph 37 of TR 97/23 states The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201), 'a physical thing which satisfies a particular notion' (the Lindsay case at 106 CLR 384; 12 ATD 201) and 'not necessarily the whole but substantially the whole of the [property] under discussion' (the Lindsay case at 106 CLR 383-4; 12 ATD 200). There is no one correct test for what is a subsidiary part and what is an entirety. Which approach to adopt depends on the facts in each particular case and, even then, the question is one to be answered in the light of all the circumstances it is reasonable to take into account (see Regent Oil Co Ltd v. Strick Inspector of Taxes [1965] 3 All ER 174 at 179; Brown (Inspector of Taxes) v. Burnley Football and Athletic Co Ltd [1980] 3 All ER 244 at 255). 21. Paragraph 40 of TR 97/23 provides examples of what doesn't constitute an entirety: Examples of property that do not constitute an entirety are the insulation and lining for a cool room ( Case T14 (1968) 18 TBRD 67) and a window in a factory (even though the window is totally restored). Something that is part of a building, e.g., a roof or wall, is just that and no more. The building itself is the entirety. 22. Under Option 1 the work is being undertaken on selected areas of the roof and not the whole roof. However, following the example in paragraph 40 of TR 97/23, the whole roof is not an entirety but is part of the building. It is the building that is the entirety. Distinction between a repair and an improvement 23. Paragraphs 44 to 47 of TR 97/23 discuss improvements: 44. The meaning of 'repair' or 'repairs' is considered in paragraphs 12 to 30 of this Ruling. In the case of a 'repair', broadly speaking, the work restores the efficiency of function of the property without changing its character. An 'improvement', on the other hand, provides a greater efficiency of function in the property - usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. 45. To distinguish between a 'repair' and an 'improvement' to property, one needs to consider the effect that the work done on the property has on its efficiency of function. This is the determinative test. 46. If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part . That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property. 47. Replacement or substantial reconstruction of the entirety, as distinct from the subsidiary parts of the whole, is an improvement. 24. The work being undertaken under Option 1 will replace the areas of the roof that have deteriorated the most. This will prevent the defect from returning in the short-term, pending a full roof replacement later. 25. With the existing metal parts that are being replaced, the replacements will result in a restoration, and not an improvement. The Taxpayer has simply replaced deteriorated parts with new parts. Use of different materials 26. Paragraphs 48 to 52 of TR 97/23 discuss the use of different materials: 48. If expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue. 49. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant. 50. If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement. 51. The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10. 52. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement. 27. Under the quote provided certain parts are going to be replaced. 28. With reference to TR 97/23 and based on the quote provided the use of a different materials would not result in the completed work being a capital expense by way of improvement. Technical advances or enhancements 29. Paragraph 53 of TR 97/23 states: As a general proposition, the greater the degree of technological advancement involved in work done to property, the more it is likely the work goes beyond a 'repair'. This is so because it is more likely the work does more than restore the property to its original efficiency of function. If it does, the cost of the work is not deductible under section 25-10. (It might be deductible under section 8-1 if the cost is a working or operating expense, and it is not of a capital nature.) 30. The quoted work is replacing existing parts that form part of the roof and does not contemplate a technological advancement or enhancement. Thus, we have not considered whether there are any technological advancements being made to the roof. Repairs done at the same time as improvements 31. Paragraphs 55 to 58 of TR 97/23 set out the Commissioner's views as to repairs undertaken at the same time as improvements: 55. The character of a repair does not necessarily change because it is carried out at the same time as an improvement. If, for example, a shopping centre is extensively renovated or restored (the project combining repairs and improvements) and if some parts of the project can be effectively separated and considered in isolation from the rest of the project, they may still be repairs. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. It is not appropriate to have regard only to the result of the entire work done. It is inappropriate to regard the whole project as an affair of capital. In other words, if individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements. 56. If, however, repair work is inextricably bound up with work of an improvement nature, and the repair work cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, we regard the cost of the entire work as being of a capital nature and not deductible. 57. For example, if work normally regarded as a repair, such as painting, is done to property as part of, or in conjunction with, a reconstruction and modernisation of the property, and it cannot be segregated and its cost separately quantified, it may not be deductible. It is again a question of fact and degree. 58. Expenditure on 'notional' repairs is not deductible; see paragraph 35 of this Ruling. 32. The quote does not discuss improvements, but should improvements be agreed upon, the cost of improvements can be separated from the total costs. The remaining costs which are in relation to repairs, can then be examined separately to determine the extent to which they may expenditure that is capital in nature. Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs) 33. Paragraphs 59 to 61 and 125 to 131 of TR 97/23 discusses initial repairs: 59. Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs. 60. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. 61. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes) [1972] 1 All ER 681 is not authority in Australia for a contrary view. An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit - yielding structure. It is capital expenditure and is not deductible under section 25-10. ... 125. A repair after acquisition of property is an 'initial repair' if repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended. 126. The leading Australian case in this area is the High Court decision in the Thomas case. There, Windeyer J held that the costs of repairing a roof, guttering, wall, basement floor and wooden floor and painting a building in the year of income it was acquired was expenditure of a capital nature. 127. His Honour said (at 115 CLR 72; 14 ATD 87): 'Expenditure upon repairs is properly attributable to revenue account when the repairs are for the maintenance of an income-producing capital asset. Maintenance involves the periodic repair of defects that are the result of normal wear and tear in operation. It is an expense of a revenue nature when it is to repair defects arising from the operations of the person who incurs it. But if when a thing is bought for use as a capital asset in the buyer's business it is not in good order and suitable for use in the way intended, the cost of putting it in order suitable for use is part of the cost of its acquisition, not a cost of its maintenance . The decision of the Court of Session in Law Shipping Co. Ltd. v. Inland Revenue Commissioners, [(1923) 12 TC 621] is commonly cited as authority for that proposition. The principle is obvious without the need for any supporting authority.' (emphasis added) 128. His Honour made it clear that it is immaterial whether the taxpayer knew of the defects or whether the purchase price was affected by them. Windeyer J said (at 115 CLR 74; 14 ATD 88): 'It seems to me immaterial that when the taxpayer acquired the building it did not know of some of its defects.... That means only that the cost of obtaining an asset suitable for its purpose was greater than had been expected.' 129. In the Law Shipping Co case, the taxpayer in December 1919 bought for £97,000 a steamship ready to sail and with freight booked and loaded. As the periodical Lloyd's survey was then considerably overdue, an exemption from survey had been obtained for the voyage about to commence. On return from the voyage in May 1920, the ship underwent survey and the taxpayer had to spend over £50,000 on repairs. The Special Commissioners allowed a deduction of only £12,000 as being applicable to the period during which the taxpayer was the owner of the ship. The Court of Session, Scotland (First Division) held that the amount disallowed was of a capital nature and not deductible. 130. More recently, the English Court of Appeal in Odeon Associated Theatres v. Jones (Inspector of Taxes) [1972] 1 All ER 681 held that expenditure of £7,969 incurred during the period 1948-56 (in respect of dilapidations which occurred before acquisition) on the Regal Cinema at Marble Arch, which was acquired for £40,000 in January 1945 in a somewhat run-down condition, was expenditure of a revenue character. 131. A key reason for the decision was that, although the cinema was in disrepair at the date it was acquired, this had no effect on the purchase price. The purchase price was not affected because there was a war-time prohibition on repairing cinemas, causing all cinemas to be in a similarly dilapidated condition. We take the view that the decision in the Odeon Theatres case should not be followed in Australia. 34. The report provided by Entity A discusses deterioration of the roof that has occurred over time. Based on the available information, and with particular reference to the report stating there is a known issue associated with the main roofing material, the roof would have been deteriorating over a period longer than the period that the Taxpayer owned the building. 35. In summarising the above, expenditure to repair the deterioration that existed when the property was purchased on Date X will be an initial repair. The fact that the Taxpayer did not know the extent of the deterioration of the roof on Date X is not material in determining if a repair is an initial repair [1] . 36. To summarise the treatment each item listed as part of the proposed works under Option 1: (i) The remedial work includes the removal and replacement of deteriorated parts which will return that area of the roof to a better condition than that which it was in on Date X. By improving the condition of the roof to a better condition than the condition it was on Date X, part of the expense being incurred is an initial repair and as an initial repair, that expense is capital in nature. (ii) The cleaning is part of repair work as a preventive measure to stop or slow further damage. The deterioration in this area of the roof will only be reversed when the roof is replaced, and that future repair will involve an element of initial repairs. 37. As part of the total expense being incurred under Option 1 includes an expense that is capital in nature, the Taxpayer is not entitled to deduction under section 25-10 for the full amount incurred under Option 1. | Detailed Reasoning - Question 2: If the answer to question one is no, if the Taxpayer chooses Option 1, is it entitled to a deduction under section 25-10 of the ITAA 1997 for some of the amount incurred? | Summary: Yes, of the total expenses being incurred under Option 1 that are in relation to repairs, the following are not capital in nature and are deductible under section 25-10: (i) the part of the expense in respect of replacing parts that are attributable to deterioration in the period from Date X onwards, as it will rectify deterioration that occurred since the Taxpayer owned the building. (ii) The part of the total expense that is in respect of the preventive measure of cleaning to stop further damage until the roof is replaced. | Detailed Reasoning - Detailed reasons: 38. At paragraphs 63 to 66 and 136 to 140 of TR 97/23 the Commissioner sets out his view as to the ability to dissect or apportion initial repairs: | Detailed Reasoning - Initial repair costs can be dissected or apportioned: 63. An initial repair expense can be dissected or apportioned to allow a deduction under section 25-10 of any part of the expense that remedies deterioration arising from the holding, etc., of the property by the taxpayer for income purposes after it was acquired. No dissection or apportionment is available, however, if the repair expenditure is necessitated by a defect or damage to property because this expenditure is either wholly attributable to the holding, etc., of the property before the taxpayer acquired it or wholly attributable to the holding, etc., of the property by the taxpayer for income purposes after it was acquired. 64. Dissection or apportionment on a time basis is appropriate if repair costs are incurred either due to defects (whether expected or unexpected) that arise gradually over an extended period or due to wear and tear or deterioration that occurs: (a) in part before the property is acquired by a taxpayer; and (b) in part in the course of the taxpayer's holding, etc., of the property for income purposes. 65. This dissection may be done either in the year of income the property is acquired if the initial repair expenditure is incurred in that year or in a later year in which the expenditure is incurred. 66. If repair costs are attributable either to damage before property is acquired by a taxpayer, or to defects that emerged suddenly and matured by the time of acquisition of the property, no deduction is allowable under section 25-10 in accordance with paragraph 59 of this Ruling. If repair costs are attributable either to damage that occurs during the taxpayer's holding, etc., of the property for income purposes or to defects that emerge suddenly and mature during that time, a deduction is allowable if the other general principles stated in this Ruling are satisfied. ... | Detailed Reasoning - Initial repair costs can be dissected or apportioned: 136. Subsection 25-10(3) states that you cannot deduct capital expenditure under section 25-10. The old law referred to expenditure incurred for repairs, not being expenditure of a capital nature . This, in our opinion, allowed apportionment. After property is acquired by a taxpayer, it may deteriorate more during the period it is held, etc., by the taxpayer for income purposes than it had deteriorated when it was acquired by the taxpayer. The cost of bringing the property back to the state of efficiency of function that it was in when acquired by the taxpayer is deductible as a repair not of a capital nature . In other words, provided that the whole of the expenditure is for repairs, some part of that expenditure may be of a capital nature and some part of it may be deductible. 137. Expenditure for repairs to recently acquired property is fully deductible only if it involves the remedying of defects, damage or deterioration wholly attributable to the period in which the property is held, etc., by the taxpayer for income purposes. If, on the other hand, the expenditure involves putting the property in order suitable for use or the cost of remedying defects, or restoring damage or deterioration existing at the time of purchase, it is of a capital nature and not deductible under the old law. As a general rule of thumb, but subject to the facts in each particular case, repairs effected soon after the purchase of property often rectify defects in, damage to, or deterioration present in the property at the time of purchase. 138. Initial repair expenses can be dissected or apportioned under section 25-10 to allow a deduction to the extent to which the repair work remedies defects, damage or deterioration arising from the taxpayer's holding, etc., of the property for income purposes after it is acquired: see the Law Shipping case where the Special Commissioners allowed a deduction of £12,000 (out of a sum of £51,558 incurred on repairs) as being applicable to the period during which the company owned the ship. See also (1962) 10 CTBR (NS) Case 84 ; (1963) 11 CTBR (NS) Case 63 ; (1950) 1 CTBR (NS) Case 18 and (1959) 8 CTBR (NS) Case 137 in which purchased properties were repaired and Taxation Boards of Review allowed a portion of repair expenditure; contrast the views of Senior Member, Mr PM Roach, in Case V167 88 ATC 1107; AAT Case 12 (1986) 18 ATR 3056 and Case W7 89 ATC 161; AAT Case 4845 (1988) 20 ATR 3170. 139. We accept that Windeyer J in the Thomas case (at 115 CLR 74; 14 ATD 88) was saying nothing more than that there was insufficient evidence in relation to the items of expenditure he was considering in that particular case to permit him a basis of apportionment. Windeyer J was not saying categorically that apportionment is never possible. This approach is also suggested by his Honour citing with approval the decision in the Law Shipping case. 140. We accept, for example, that a court might agree to apportionment if a taxpayer is able to identify the extent to which repair expenditure is necessitated by deterioration arising after property is acquired and is attributable to the taxpayer's holding, etc., of the property for income purposes. 39. In applying the views in paragraphs of TR 97/23, the total amount quoted in respect of Option 1 must be dissected and apportioned to properly reflect what represents capital expenditure that is an initial repair. With reference to paragraph 55 of TR 97/23, repairs should be isolated from improvements to also properly reflect what represents improvements over repairs. 40. Should a decision be made to make an improvement, its cost should first be isolated from the cost of repairs. 41. The balance that constitutes a repair can be dissected so that only the expenses that include initial repairs are apportioned on a time basis to remove the amount that relates to deterioration that occurred before Date X. 42. Once the cost of replacing the deteriorated metal parts is known it can be dissected from the total costs and be apportioned using the time basis outlined in paragraph 64 of TR 97/23 and the amount attributable to deterioration that occurred after Date X can be deducted under section 25-10. 43. The remainder of costs in respect of the preventative work that prevents or slows future damage, but does not reverse the deterioration that has occurred, do not need to be apportioned and can be deducted under section 25-10 [2] . | Detailed Reasoning - Question 3: If the Taxpayer chooses Option 2, is it entitled to a deduction under section 25-10 of the ITAA 1997 for the full amount incurred? | Summary: No. By replacing the roof, all the deterioration that has occurred since the roof was installed, or last replaced in full, is removed, bringing the condition of the whole roof back to the condition it was in when installed or last replaced in full. This will be a better condition than would have existed on Date X, so the repairs being undertaken include an element of initial repairs, which is a capital expense that is excluded from deductibility under subsection 25-10(3). As there is an amount that is excluded from deductibility under subsection 25-10(1) because of the application of subsection 25-10(3), the whole cost of the roof replacement is not a deductible under section 25-10. | Detailed Reasoning - Detailed reasoning: 44. Entity A was commissioned to investigate the cause of damage into the building and Option 2 requires that the whole roof be replaced. In contrast, Option 1 dealt with the damage using a mixture of replacement, repair and preventive action. 45. The same factors that were considered above for Option 1 need to be considered in respect of Option 2. Distinction between repair and either renewal or reconstruction- what is meant by an entirety 46. In the example in paragraph 40 of TR 97/23, the roof is part of the building and it is the building that is the entirety. 47. The replacement of the whole roof under Option 2 is not a replacement of an entirety. Distinction between a repair and an improvement 48. Unlike Option 1 where different levels of work are being undertaken, the roof replacement will require removal of the deteriorated/aged roof and replacement of it with new roofing materials with no deterioration, and which would in effect take the roof back to an 'as new' condition. 49. However, replacing a roof may require work to satisfy changes in law that came in after the roof to be replaced was installed which, if required by a regulatory body (and for no other purpose), would not be undertaken. Expenditure to meet the requirements of a regulatory body is discussed in paragraphs 23 to 25 and 96 to 99 of TR 97/23. As stated at paragraph 97 in relation to section 25-10, '...work done solely to meet requirements of regulatory bodies is not a repair for the purpose of the section.' 50. If a statutory authority decides that changes must be made when replacing the entire roof, then part of that work may be an improvement. 51. As no part of the proposed works under Option 2 is to be undertaken, in whole or in part, because it is required by a regulatory body, so this has not been considered. Use of different materials 52. The quote is silent about whether the same or different material will be used to replace the roof. 53. Based on the available information, the use of different materials to, for example, replace a roof sheet of the same shape and design as an existing sheet would not produce a change in the function of the items once the work is completed. 54. With reference to TR 97/23 and based on the quote provided, the use of a different material would not result in the completed work being a capital expense by way of improvement. Technical advances or enhancements 55. Under the quoted work, it is proposed to replace existing parts that form part of the roof, and the inclusion of technological advancements is not specified. As the quote does not contemplate a technological advancement or enhancement, we have not considered whether there are any technological advancements being made to the roof. Repairs done at the same time as improvements 56. If the final agreed work results in part of the total work being an improvement, then, as outlined in paragraph 55 of TR 97/23, the individual part/parts of the total project costs that is/are an improvement can be separated from the costs associated with restoring the roof's function. Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs) 57. The replacement of the roof under Option 2 resulted from the investigation by Entity A due to a fault in the roof and represents a longer term but costlier solution to Option 1. 58. As a longerterm solution, Option 2 does away the with preventative measures that prevent or slow further deterioration and instead replaces the whole roof, returning the roof to an 'as new' condition. 59. There is nothing in the report that indicates changes to the design or functionality of the roof under Option 2. Unless there are unstated terms or further negotiations which alter the facts that the Commissioner has been asked to rule on, the replacement of the roof is a repair. 60. However, replacing the roof will rectify the deterioration that has occurred since the roof was installed: A full replacement will restore the whole roof to a better condition than it was in on Date X. 61. By improving the condition of the roof to a better condition than its condition on Date X, part of the expense incurred would be an initial repair and thus capital in nature. 62. As part of the total expense being incurred under Option 2 includes an expense that is capital in nature, the Taxpayer is not entitled to a deduction under section 25-10 for the full amount incurred under Option 2. | Detailed Reasoning - Question 4: If the answer to question three is no, if the Taxpayer chooses Option 2, is it entitled to a deduction under section 25-10 of the ITAA 1997 for some of the amount incurred? | Summary: Yes. The total expense being incurred under Option 2 will include expenditure in respect of replacing the roof that is attributable to rectifying deterioration of the roof from Date X onwards, which is the period that the Taxpayer owned the building. The portion of the total expenditure on replacing the roof, to the extent that it is attributable to addressing deterioration in the period from Date X onwards is deductible under section 25-10. | Detailed Reasoning - Detailed reasoning: 63. Applying the views set out in TR 97/23, the total amount quoted in respect of Option 2 is for a roof replacement. 64. In accordance with paragraph 55 of TR 97/23, as the final agreed work would result in returning the roof to a better condition than its condition on Date X, the cost of those improvements may be isolated from the cost of the repairs. 65. The total cost must be dissected and apportioned to properly reflect the proportion that represents capital expenditure that is an initial repair. Applying paragraph 55 of TR 97/23, repairs should be isolated from improvements to also properly reflect what represents improvements over repairs. 66. The balance that constitutes a repair can then be apportioned on a time basis between the cost of rectifying deterioration that occurred before Date X, and the cost of rectifying the deterioration that occurred after Date X. 67. The amount that is in respect of the deterioration that occurred after Date X will be the amount that is deductible by the Taxpayer under section 25-10. [1] W Thomas and Co Pty Ltd v. FC of T (1965) 115 CLR 58 (1965) 14 ATD 78 [2] The reversal of deterioration would happen if Option 2 was chosen and, rather than clean and treat the area identified in Option 1, the deteriorated roof is replaced instead.

Question 1: If the Taxpayer chooses Option 1, is it entitled to a deduction under section 25-10 of the ITAA 1997 for the full amount incurred?