Private ruling: Business deductions
Date of advice: 18 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you entitled to an immediate deduction for the sealing of a road paid by you and owned by another entity? | A1: No | Q2: Are you entitled to a capital works deduction for the sealing of a road paid by you and owned by another entity? | A2: Yes

Relevant facts and circumstances: You are a primary producer. You have been cultivating the product for XX years. You paid the owner of the adjacent property to improve it. The property was improved with a different material to stop your product being damaged.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 43-20

Reasons for decision: Summary: Section 25-10 of Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs made to premises or depreciating assets used for producing assessable income. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature. An improvement to a property would be capital in nature and therefore not deductible under either section 25-10 or section 8-1 of the ITAA 1997. Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. TR 97/23 provides that where the work done to a property results in a greater efficiency of function in the property, the work represents an 'improvement' rather than a 'repair'. In your case, the work undertaken was to alleviate a problem which potentially damaged the product. The work is not to repair or replace a part of something or correct something that is already in existence which has become worn out or dilapidated. The work provides a greater efficiency of function to the property. Therefore, the work carried out on the property is considered to be more accurately characterised as an improvement rather than a repair or maintenance. Consequently, a deduction is not allowable under either section 25-10 or section 8-1 of the ITAA 1997. Capital works A deduction is available under Division 43 of the ITAA 1997 for construction expenditure for certain capital works. Section 43-20 of the ITAA 1997 recognises three categories of capital works: ● buildings or extensions, alterations or improvements to buildings; ● structural improvements or extensions, alterations or improvements to structural improvements; and ● environmental protection earthworks. Some examples of structural improvements are: a) sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields; and b) earthworks that are integral to the construction of a structural improvement (other than a structural improvement described in subsection (4)), for example, embankments, culverts and tunnels associated with a runway, road or railway. The use of the material in this case is considered an improvement, giving the property a greater efficiency of function. Therefore, you are entitled to a capital works deduction in relation to the property.