Case C31

Judges:
JL Burke Ch
RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 25 May 1971.

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J.L. Burke (Chairman) and R.C. Smith, Q.C., and R.E. O'Neill (Members): The taxpayer is the owner of a corner block of 16 single storied lockup shops, some with street frontages and others fronting an arcade 212' in length by 12' wide which runs through the property from street to street taking a right angled turn on the way. The building was erected in 1961/1962 and the arcade is open to the public 24 hours a day. The original arcade ceiling consisted of a grid system of aluminium channelling covered with black vinyl material and suspended by wire from the roof rafters. Acoustic polythene infills, measuring 3' x 2' and approximately ½'' thick, were fitted into the grids and their edges rested on the aluminium channelling. Fluorescent lights hung from the roof rafters to a point just above the ceiling so that the light percolated through the foam infills to give a diffused lighting effect.

2. Although it was very decorative the ceiling of the arcade was subjected to considerable damage from time to time. The polythene bats were held in place on the channelling by light spring clips and were easily displaced and broken. Wind to which the property was exposed tended to lift the polythene infills and they were broken from time to time by vandals pushing surf boards and other objects through them. The bats were replaced by the owners periodically but by 1968 the ceiling was broken in places, discoloured and generally in need of repair.

3. The owners, deciding, apparently, that the existing ceiling was unsuitable, put in hand a contract for the replacement of the 3' x 2' polythene infills with 6' x 3' asbestos sheets. The infills were completely removed together with the channelling in which they rested, ceiling joists with 18'' centres were installed, asbestos sheets were nailed thereto and the joins were covered by battens. The lighting wires were extended and the fluorescent lights were installed in 14 troughs recessed flush with the ceiling. The new ceiling was at the same elevation as the old ceiling.

4. The asbestos ceiling because of its rugged texture (compared with ½'' polythene) and method of affixation (18'' centres) can be expected to have considerable advantages over the one it replaced in withstanding the elements and the damage by vandals.

5. To have completely replaced the polythene infills in the ceiling with identical material would have cost approximately $350. The fibro ceiling cost $2,300 and the question is whether the taxpayer is entitled to a deduction thereof pursuant to sec.53(1) of the Commonwealth Assessment Act as being expenditure incurred for repairs not being expenditure of a capital nature.

6. In
F.C. of T. v. Western Suburbs Cinemas Ltd. (1952) 86 C.L.R. 102 at pp. 105-106 Kitto J. considered the question of deductibility of expenditure on replacement of a ceiling in a picture theatre. In the course of entering judgment adverse to the taxpayer his Honour expressed himself as follows -

``Even if, on this evidence, the provision of a new ceiling for the theatre should be regarded as a repair within the meaning of sec.53, I should have thought that the expenditure involved was expenditure of a capital nature and therefore not allowable as a deduction by virtue of that section. To decide whether a particular item of expenditure on business premises ought to be charged to capital or revenue account is apt to be a matter of difficulty, though the difference between the two accounts is clear enough as a matter of general statement (
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337, at p. 360). In this case the work done consisted of the

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ATC 143

replacement of the entire ceiling, a major and important part of the structure of the theatre, with a new and better ceiling. The operation seems to me different, not only in degree, but in kind, from the type of repairs which are properly allowed for in the working expenses of a theatre business. It did much more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future. The case resembles one of the illustrations given by Rowlatt J. in
Mitchell v. B.W. Noble Ltd. (1927) 1 K.B. 719 at p. 729. As his Lordship there observed, if you say, `I will not have a railing which perpetually falls down or wants repainting; I will abolish it and I will build a brick wall which will not fall down or will not want painting', that is a capital expenditure. The truth is, I think, that the new ceiling was an improvement to a fixed capital asset and that its cost was a capital charge.''

7. We find his Honour's observation particularly apt in this case and are persuaded to the view that the expenditure which the taxpayer incurred in the year of income was of a capital nature and therefore not allowable. Here it can be said that the work involved the replacement of the entire arcade ceiling. It did much more than meet a need for restoration of the old ceiling's efficiency in function; it gave the arcade a ceiling which, in its context, had a changed character with considerable advantages over the one it replaced. It is obvious, on the evidence before us, that the likelihood of damage to the ceiling, with a consequent involvement of the company in expenditure for repairs, has been considerably reduced by the work which has been effected. For a similar finding on like facts see 10 T.B.R.D. Case K83.

8. We would uphold the Commissioner's decision on the objection and confirm the assessment the subject of review.

Claim disallowed.