Private ruling: Deductions-Repair v Capital
Published: June 2015
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to an immediate deduction for the road work performed at your business premises? | A1: No | Q2: Are you entitled to a capital works deduction for the road work performed at your business premises? | A2: Yes

Relevant facts and circumstances: You and your spouse run a business in Town A. This region experiences periods of heavy rainfall. These specific climate conditions have damaged the gravel access road into the property causing significant rutting and restricting access to the property. You purchased brick clay pavers. Sections of the gravel were repaired and a concrete layer added and then the pavers were laid to prevent further damage. The pavers were laid in a pattern to prevent any movement from the large heavy vehicles which access the property.

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 of severe rutting and restricting access to your property caused by wet weather, by adding a concrete layer and pavers over the gravel road of your property. 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 as it improves the access in all types of weather. Therefore, the work carried out on your road 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 concrete and pavers in this case is considered an improvement, as a road would not be affected by wet weather, giving the road a greater efficiency of function. Therefore, you are entitled to a capital works deduction in relation to the road works.