Private ruling: Income Tax - Deduction - Repairs
Date of advice: 29 June 2017
Published: October 2017
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the loss on the sale of an adjacent building for the purpose of expanding a commercial premises in order to meet the requirements of a lease, constitute a deductible repair under provisions of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: The taxpayer derives income from a commercial property that has been leased by the lessee for a number of years, and that is specific to the needs of that lessee. Early in the relevant financial year, the taxpayer was approached by representatives for the lessee who advised that if the size of the commercial premises was not increased they would not be renewing the lease. Given the specific nature of the property, the taxpayer determined that it would be difficult to find a new tenant for the property. Accordingly in order to renovate the premises to comply with the requirements of the lessee, the taxpayer purchased the property adjacent to the commercial premises to allow for the expansion of the commercial premises. The purchase contract apportioned the price between the land and the building located on the land. The building located on the property was sold by the taxpayer for a nominal value and was removed from the land. Work was then carried out on the commercial premises to meet the requirements of the lessee. This work involved modifications to the structure of the building located on the premises. The taxpayer acknowledges that this constitutes an improvement. The taxpayer sought a ruling on whether the loss on the sale of the building purchased in order to expand the commercial premises to meet the requirements of the lessee, is a deductible repair under provisions of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1, | Income Tax Assessment Act 1997 Subsection 8-1(1), | Income Tax Assessment Act 1997 Paragraph 8-1(2)(a) and | Income Tax Assessment Act 1997 Section 25-10.

Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 provides that you can deduct any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, paragraph 8-1(2)(a) provides that you cannot deduct a loss or outgoing to the extent that it is of a capital nature. Likewise, section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises held or used solely for income-producing purposes. However, subsection 25-10(3) prevents such a deduction where the expenditure is of a capital nature. Taxation Ruling TR 97/23 Income Tax: deductions for repairs (TR 97/23) provides at paragraph 32 that expenditure relating to a property is of a capital nature where the work carried out represents a reconstruction of the entirety. Paragraph 115 defines an entirety as a part of the entire premises that is capable of providing a useful function without regard to any other part of the premises. | Detailed Reasoning - Application to the facts: The commercial premises was used by the taxpayer for income producing purposes, as it was the subject of a commercial lease that produced assessable income. We consider the purchase of the property to be expenditure related to the work carried out on the commercial premises as the expenditure was necessary in order to carry out that work. The building located on the commercial premises is an entirety as it is capable of providing a useful function without regard to any other part of the premises. Accordingly, the work to the commercial building represents a reconstruction of the entirety as it consisted of modifications to the original structure of the building, and therefore we consider the expenditure for the work to be of a capital nature. As the work done to the commercial building is of a capital nature, we consider that the related purchase of the property is also of a capital nature, as per paragraph 22 of TR 97/23. Accordingly, we conclude that the loss on the sale of the building is of a capital nature, and is therefore not deductible under either section 8-1 or section 25-10 of the ITAA 1997, by virtue of paragraph 8-1(2)(a) and subsection 25-10(3).