Case V167

PM Roach SM

Administrative Appeals Tribunal

Judgment date: 7 November 1986.

P.M. Roach (Senior Member)

In this reference the applicant claims an income tax deduction in respect of his half-share of expenditure on a rented property owned by the applicant and his wife and let by them. He claims that the expenditure was upon ``repairs'' and that he is entitled to the deduction pursuant to sec. 51 and 53 of the Income Tax Assessment Act. The question as to whether the works carried out constituted ``repairs'' falls to be determined in accordance with the decision of Windeyer J. in
W. Thomas & Co. v. F.C. of T. (1965) 14 A.T.D. 78. In that case his Honour said (at p. 87):

``Repair involves a restoration of a thing to a condition it formerly had without changing its character... (It) is restoration of efficiency in function rather than exact repetition of that [sic] form... that is significant...''

2. In 1970 the applicant arranged with his parents to purchase from them the family home constructed at some time during the 1950s. In the years following he paid them the agreed purchase price. The final payment was made in 1975 and in 1977 the property was transferred to him for the price agreed in 1970. That was $10,000. That price was substantially less than the 1977 value of the property. That was the consideration upon which stamp duty was paid in 1977 and, given that it was the purchase price agreed upon in 1970, that was the consideration in respect of which stamp duty was payable. The applicant's parents remained

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in possession of the property until October 1977. They then vacated it to move into a new home. At that time the title was transferred to the applicant and his wife - a transaction in relation to which, so far as the wife was involved, stamp duty may not have been paid as it should - and thereafter they were able to let the property to tenants. The applicant derived no rental income from his parents during any period of their occupancy. Following their departure, he let the property for a period of 12 months. The tenant was a company and the occupier was an employee of that company. At the expiration of the initial term of 12 months the company exercised its option to extend the tenancy for a further 12 months at an increased rental.

3. The applicant's evidence was that throughout the period during which his parents resided in the premises they were in ``perfect'' condition. I think that evidence was exaggerated but accept that the premises were in reasonable condition. The applicant was well familiar with them and regularly visited the house while his parents resided there. During 1982 he allowed the property to be unoccupied for a substantial period during which extensive works were carried out. One factor contributing to delay in effecting the works was the circumstance that the applicant was employed approximately 100 km away. He travelled to the property when opportunity presented and his employment permitted in order to carry out minor works of maintenance which are not in dispute. He commenced these works after the tenants had vacated of their own account. His evidence was, and I accept it, that their departure was not occasioned by any deficiency in the condition of the premises or attended by any complaint as to the condition of the premises. He also gave evidence - which I accept - that there had been no threats of condemnation of premises by either the local authority or electricity authority and that there had been no misuse of the premises by the tenants or vandalism by either tenants or others.

4. When inspecting the premises internally, he noted the effects of roof leaks. What he noticed led to the re-covering of the roof. The roof leaks had contributed to the sagging of the kitchen ceiling and that sagging contributed to a decision to replace the kitchen cupboards and to reorganise the layout of the kitchen. A kitchen window was also replaced and electrical wiring throughout the premises was replaced. The total deductions claimed by the joint owners as ``repairs and maintenance'' amounted to $8,126. The Commissioner adjusted the income of the applicant as returned by disallowing one-half of particular expenses. The amounts disallowed were described in the adjustment sheet accompanying the notice of assessment as follows:

      ``Replacement of roof & spouting       $1,870
      Replacement of kitchen cupboards        890
      Replacement of window                   139
      Rewiring                                730''

5. Roof and spouting: Upon the evidence the original roof was constructed with a type of concrete tile believed to be obsolete. The applicant's evidence was that in 1977 there were no signs of cracking obvious from any ground inspection. However, by early 1982, the premises were leaking to a point where the applicant saw fit to consult a builder who advised that the roof was beyond repair. The applicant asked what was the cheapest solution to the problem and was advised to substitute a ``tin roof''. The new roof was installed on the old framing without being realigned. Those works cost $3,741.

6. Kitchen cupboards: The original kitchen included cupboards which comprised a bench-height cupboard incorporating a sink which extended along the external wall under the kitchen window; overhead cupboards extending to the ceiling on either side of that window; and a bench-height cupboard on part of the opposite wall. The cupboards suffered some water damage but I am not persuaded that it was other than slight. The original cupboards were constructed of solid timber and apparently at least, were not as well finished as their replacements. The bench-tops were covered with laminex or a similar material. All of those cupboards were removed and bench-height cupboards along the length of the external wall were replaced by custom-built cupboards of more modern design. The overhead cupboards and the bench cupboards on the opposite wall were not replaced. In lieu an island bench with cupboards underneath was provided which was in keeping with modern concepts of design. Overall no additional storage facilities were provided. The total cost was $1,781.

7. Kitchen window: The kitchen window frame in the original premises was of timber

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construction set in a double concrete block wall. It was said that it had deteriorated due to weathering and water damage but I am not persuaded that the deterioration was such that the window needed to be replaced. It was replaced by an aluminium-framed window set in the same aperture as the window it replaced. The cost of replacing the window was $278.

8. Electrical wiring: The house was rewired throughout. The condition of the wiring had not been checked by the applicant in 1977 but it had given no trouble in that year or in the years following prior to 1982. In 1982 the applicant saw an electrician about replacing a power point and was advised that the wiring was unsafe and should be rewired. The applicant admitted that in the course of the rewiring a couple of extra power points may have been installed. The total cost of the rewiring program was $1,460.

9. Overall the applicant contended that the renovations had not increased the rental value of the property and that when the premises were relet any increase in rental there may have been was unrelated to the works which had been carried out. I do not accept that. However, I do accept that, except for the kitchen, the expenditure did not have any effect other than to overcome the effects of deterioration in the condition of the premises which had occurred with the passage of the years.

10. For the Commissioner it was contended that the deterioration which needed to be remedied in 1982 was attributable to all of the years since the construction of the premises in the early 1950s; and that as the letting period had been only four years (1977-1981) out of some 30 years (1951-1981) the expenditure was substantially attributable to a period of many years before the derivation of assessable income and therefore not allowable.

11. I first address the question as to whether the works carried out were proper to be characterised as belonging to capital account or revenue account. At the outset it is to be observed that the lettable structure was the totality of the building which was an entirety in itself. Replacement of the roof cover and of rewiring in my view did nothing more than effect ``repairs'' to that entity. Nor do I think that the works so carried out ceased to be ``repairs'' because of a difference in materials because I am satisfied that no more was involved in that than the use of materials having only the same functional purpose and effect as those they replaced. The materials used did not effect such an improvement as to go beyond mere restoration and thereby lose the character of the repair.

12. Further as to the electrical wiring, I am also of opinion that its character as repair is not to be denied by reason only of the probability that a couple of power points were added or that others were relocated. Power points only serve as convenient points of connection to a power supply.

13. I am not so persuaded in relation to the kitchen cupboards. The kitchen was part of the lettable structural entity, but I am satisfied upon the evidence that the kitchen was ``renovated'' not so as to only make good deficiencies which had developed over a period of time and to only restore the kitchen to its original condition so far as that was possible. Instead, the work undertaken was to restructure the kitchen according to a new standard perceived, according to the fashion of the time, as being a better standard. Even though cupboard space was not increased the layout and arrangement; the method of construction; and the appearance of the kitchen were all changed substantially. I am not persuaded that any portion of those works should be characterised as ``repairs''. Nor did the window replacement constitute repair. It too contributed to the image of the new kitchen. Further, as I have already said, I am not persuaded that the deterioration of the old window was so extreme as to make replacement the most appropriate means for effecting any necessary ``repair''. That persuades me that the new window was of the character of remodelling rather than repair.

14. I conclude by referring to a particular argument advanced on behalf of the Commissioner. It was that the works which needed to be carried out in 1982 were attributable to all of the years since construction was carried out in the early 1950s; that as the letting period had been only four years (1977-1981) out of about 30 years (1951-1981) the expenditure was not attributable to the period for which the property had been used for the derivation of assessable income and therefore no deduction was allowable. I accept that most things commence to deteriorate from the date of their construction and, in that sense, the need for most repairs can

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be attributed to the totality of the period of their prior existence even if it is not co-extensive with their total period of prior use. I also accept that when an asset is acquired in a run-down condition an expense is incurred to restore it to an earlier condition. It is proper to characterise that expenditure as having the character of capital because such expense, as much as the purchase price, is an expense attributable to acquiring an asset and putting it into a condition suited for the purposes of its new owner. But that is not to say that if the need for repair is occasioned by deterioration, and deterioration can be attributed to prolonged years of existence including use by others or use for non-income producing purposes, that costs of repairs are not to be properly characterised as belonging to revenue account. A matter of repair is proper to revenue account if the need for the expenditure arises out of its use while the property is being applied to income-producing purposes. If a taxpayer buys a property with the view to letting it at a rent and immediately paints it throughout before letting it, the expenditure may be fairly characterised as capital, but if he buys it two years after it has been painted throughout and in consequence needs to and does repaint it throughout two years earlier than if he had painted immediately after purchase, that does not deny the character of ``repair and maintenance'' to the post-tenancy painting.

15. For the reasons set out above I would allow the objection to the extent of varying the determination of the Commissioner upon the objection by reducing the taxable income of the applicant by $2,600.

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