Private ruling: Deductibility of repairs
Date of advice: 6 August 2018
Published: September 2018
Ruling period: 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the Rulee entitled to claim a tax deduction for the replacement of an asbestos roof on the factory in which it currently operates its business? | A1: Yes.

Relevant facts and circumstances: You operate a business from a factory. The original roof and gutters were constructed during the 1980’s and contain asbestos fibre sheeting. Due to ordinary wear and tear, the roof and gutters had fallen into disrepair over the years and needed extensive repairs. The roof and gutters can no longer be patched due to rusting and unavailability of asbestos sheeting. You would like to replace the entire roof and gutters of the building. To replace the box gutters, the asbestos roof sheeting will need to be removed to gain access. The asbestos sheeting on the original roof is no longer available on the market. As the asbestos sheeting is no longer available, the roof and gutters will be replaced with colorbond and polyair reflective insulation. The new roof will include skylights which are polycarbonate corrugated sheets that allow natural sunlight through. There are similar skylights in place in the current roof but they have aged, becoming brittle and discoloured.

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

Reasons for decision: Summary: The expenditure you incur to replace the roof and gutters will be deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for producing assessable income to the extent that the expenditure is not capital in nature. Section 25-10 doesn’t require that the taxpayer owns the property but merely depends on whether the taxpayer held or used the property for income producing purposes. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which expenditure incurred for repairs are an allowable deduction under section 25-10 of the ITAA 1997. The word 'repair' is not defined within taxation legislation. Accordingly, it takes its ordinary meaning. Paragraphs 13 -16 of TR 97/23 specifically deal with the 'ordinary meaning of repairs'. The word 'repair' 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. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. A repair restores the efficiency of function of the property without changing its character. In contrast, TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: ● the work is an initial repair, ● the extent of the work carried out represents a renewal or reconstruction of the entirety, or ● the works result in an 'improvement' rather than a 'repair'. | Detailed Reasoning - An initial repair: According to paragraph 125 of the TR 97/23, a repair after the acquisition (whether by purchase, lease or licence) of property is an 'initial repair' if the 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. That is, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended. | Detailed Reasoning - Renewal or reconstruction of the entirety: Property is more likely to be an entirety if the thing or structure is an integral part of entire premises and is capable of providing a useful function without regard to any other part of the premises. In contrast, the thing or structure is more likely to be a subsidiary part, rather than an entirety, if it is physically, commercially and functionally an inseparable part of something else. Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'. | Detailed Reasoning - An improvement: Paragraph 124 of TR 97/23 states the relevant considerations to determine whether work carried out constitutes an improvement or a repair, are whether: ● the thing replaced or renewed was a major and important part of the structure of the property, ● 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, ● the thing was replaced with a new or better one, and ● the new thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future. 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 the restoration of a thing's efficiency of function (without changing its character) rather than the exact repetition of form or material that is significant. 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 repair. However, the greater the work enhances the efficient functioning of the property the more likely it is that the work constitutes an improvement. The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement. | Detailed Reasoning - Application to your circumstances: The damage to the roof and gutters on the building in which you operate your business is the result of ordinary wear and tear. The roof and gutters cannot be patched due to rusting and the unavailability of asbestos sheeting. You therefore propose replacing the entire roof and gutters. The building was clearly suitable for income purposes in the way intended because you have carried on your business in the building for a number of years. Therefore, the replacement of the roof and gutters is not an initial repair. The replacement of the roof and gutters is also not regarded as a ‘renewal or reconstruction of the entirety’ because the building itself is the entirety. The roof and gutters are only a part of the entirety. The roof and gutters will be replaced with colorbond and polyair reflective insulation because asbestos materials are no longer available. Colourbond and polyair reflective insulation perform substantially the same function as the asbestos. The materials and processes to be used in the proposed roof and gutter replacement therefore will do no more than restore the roof to an acceptable condition. Replacing an asbestos roof and gutters with colorbond and polyair reflective insulation does not materially alter the character or functionality of the property, therefore the replacement of the asbestos roof and gutters with more modern materials is not regarded as an improvement. In summary, the removal and replacement of the asbestos roof and gutters is not an initial repair, an improvement, or a renewal or reconstruction of the entirety, and therefore is not capital in nature. The proposed replacement of the asbestos roof and gutters is a repair because it will replace and correct something that is already there that has become worn out or dilapidated. It will restore the efficiency of function of the property without changing its character and is in respect of property you hold and use for your business to produce assessable income. The expenditure you incur to replace the roof and gutters will therefore be deductible under section 25-10 of the ITAA 1997.