Private ruling: Income tax – deductions for repairs
Date of advice: 27 February 2019
Published: May 2019
Ruling period: The income year ended 30 June 20XX
Date scheme commenced: During the income year ended 30 June 20XX

Ruling: Q1: Is the cost of replacing a deteriorating and damaged awning on a Property that is used for business purposes deductible as a repair under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Entity owns and operates a business out of a Property. Since acquiring the Property, the awning of the Property had deteriorated to the extent that general repairs and maintenance were not sufficient and replacement was necessary. Details of the deterioration include general wear and tear and the resulting deterioration of the strength of the awning. The local Council had previously raised awareness of the structural integrity of the awning and the Entity engaged an engineer to examine the structure. A structural report prepared by the engineer contained the following information regarding the condition of the awning at that time: ● The structural portions of the awning consist of timber roof purlins, timber ceiling joist, steel trusses and steel rod hangers. ● The structure of the existing awning does not show any signs of imminent failure, however the timber roof purlins are spaced too far apart and are undersized in the long spans of the main awning section. These structural deficiencies result in ‘high deflections under light foot traffic’. The existing timber roof purlins do not comply with the current standard. ● The existing timber ceiling joists are generally structurally adequate. In the longer spaces it would be prudent to provide intermediate support off the new purlins to avoid any future deflection issues. ● The main elements of the existing steel trusses are structurally adequate, however diagonal web members need to be installed to allow the trusses to carry the current loading. ● The existing steel rod hangers are adequate to take the current loading, however the connection of these hangers to the steel trusts needs to be strengthened. It was recommended that additional steel columns be introduced into the internal skin of brickwork to ensure that the load from the hangers is transferred to the floor and roof structures. ● The current loading code requires the roof sheeting on the awning to have the capacity to support a uniformly distributed live load of 1.5kPa. The current sheeting cannot do this and needs to be replaced. Following this report, water leaks also began to form causing the internal beams within the awning to rot and the frame of the awning to buckle. Another engineer was engaged to re-examine the structure and undertake any necessary works. The engineer determined that the structural integrity of the awning was not sufficient and that additional supports were required. The additional supports suggested were deemed unsuitable due to the flooring type of the building. Due to the damage caused by the wood rot and buckling it became necessary for the awning itself to be replaced and for additional supports to be utilised at the same time to ensure compliance with current regulations. In 20XX, following an order from the local Council, the existing awning was demolished and a new awning constructed. The new awning was generally constructed in the same design and, as much as feasibly possible, with the same materials as the original awning. In this regard, it is noted that when constructing the new awning, the facia of the original awning was retained and reused on the new awning and the pressed metal ceiling lining of the original awning was replaced with matching new lining. Additional steel columns were however added to the new awning to strengthen its load capacity. The timber roof purlins were also replaced with steel purlins and additional purlins were added. In addition, new steel roofing bracing, a new steel fascia beam and steel rafters were added as well as stronger roof sheeting.

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

Reasons for decision: Summary: The cost of replacing the awning on the Property is not considered to be deductible as a repair under section 25-10 of the ITAA 1997 as it is a capital improvement. | Detailed Reasoning - Detailed reasoning: Subsection 25-10(1) of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. | Detailed Reasoning - The meaning of repairs: The word ‘repairs’ is not defined in the ITAA 1997. In its context in section 25-10 of the ITAA 1997, the word repairs therefore bears its ordinary meaning. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the ITAA 1997. Paragraph 13 of TR 97/23 provides that the word repairs 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. Paragraph 15 of TR 97/23 further explains that: 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 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. | Detailed Reasoning - Work done to meet requirements of regulatory bodies: Paragraph 96 of TR 97/23 is relevant to the current circumstances and states: To constitute a ‘repair’ for the purposes of section 25-10, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in this Ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a ‘repair’ for the purposes of the section. | Detailed Reasoning - Capital nature: TR 97/23 however notes that expenditure for repairs to property is of a capital nature, and therefore not deductible under section 25-10 of the ITAA 1997 where: (a) the work is an initial repair; or (b) the extent of the work carried out represents a renewal or reconstruction of the entirety; or (c) the work results in an improvement in the property rather than a repair. | Detailed Reasoning - What is an entirety?: In the case of WG Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58; (1965) 14 ATD 78, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. Relevantly, paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety. | Detailed Reasoning - Repair or improvement: TR 97/23 (in paragraph 44) explains that with a repair, 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. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. Paragraph 16 of TR 97/23 further highlights that to repair property improves to some extent the condition it was in immediately before the 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 of the ITAA 1997. Paragraph 124 of TR 97/23 flags the following considerations that may be relevant in distinguishing between a repair and an improvement: (a) whether or not the thing replaced or renewed was a major and important part of the structure of the property; (b) whether the work performed did more than meet the need for restoration of efficiency of function, bearing in mind that 'repair' involves a restoration of a thing to a condition it formerly had without changing its character; (c) whether the thing was replaced with a new and better one; and (d) whether the new thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future. | Detailed Reasoning - Application to the Entity’s circumstances: In the current circumstances, in accordance with the Council orders to remedy damage, the entire awning of the Property was demolished and a new one constructed. The new awning is of the same function and was generally constructed in the same design and, as much as feasibly possible, with the same materials. It is initially noted that, although the replacement of the awning would not be considered an ‘entirety’ (as flagged in paragraph 40 of TR 97/23) and precluded from deductibility on this basis alone, the substantial nature of the construction would still be a factor that would indicate that the expenditure is of a capital nature. In contrast, the following attributes are suggestive of repairs: ● The new awning design and structure are generally the same as the original awning; ● The original facia of the awning was retained and reused on the new awning; ● The pressed metal ceiling lining was replaced with new lining that matched the original design; and ● The existing metal cornice adjoining the Property wall and awning was retained. However the following features of the new awning indicate that the newly constructed awning did more than just restore the awning to its original condition and accordingly would be considered to be a capital improvement: ● The existing steel rod hangers, which were connected from the steel trusses to the masonry wall of the Property, were replaced with new steel columns which strengthened the load capacity. ● Timber roof purlins were replaced with steel purlins and additional purlins were added to the awning that were not part of the original structure. The additional purlins also included new ceiling purlins. ● The roof sheeting on the awning was replaced with sheeting that complied with the current loading code and had a greater capacity to uniformly distribute a live load. ● New steel roof bracing was added. ● A new steel fascia beam was added. ● New steel rafters were added. | Detailed Reasoning - Conclusion: Taking the above into consideration, it is considered that the construction of the new awning was a significant construction and did more than just restore the awning to its original condition. It provided an awning having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future. The new awning is therefore considered to be an improvement to a fixed capital asset and that its cost is a capital charge. Therefore the expenditure incurred by the Entity in relation to the work done on the Property awning is of a capital nature and not an allowable deduction under section 25-10 of the ITAA 1997.