Case W7

PM Roach SM

Administrative Appeals Tribunal

Decision date: 23 December 1988.

P.M. Roach (Senior Member)

In 1886 a 50-year lease was entered into in relation to two blocks of terrace houses in an area which is now in inner Sydney. This application relates to one of those houses. I shall refer to it as ``Harris Street''. It has probably been in use as a residence for over a century. The building sits on a plot of land enclosing 3¾ perches (for the moderns c. 95 sq. m and for those with older, but non-conveyancing, tastes some 1,021 sq. ft). The lot was nearly rectangular, measuring some 3.8 m (12 ft 2¼ in.) at the front; 3.2 m (10 ft 5½ in.) at the rear; and with a depth of about 27.35 m (c. 90 ft). It shared common brick walls with the adjoining properties and those walls extended well to the rear of the property. With an internal width of only 3.3 m (10 ft 10 in.) at the front of the house, there was no provision for a passageway within the residence. At the rear of the building the space was sufficient to accommodate one small to medium motor car enclosed behind a roller door. The structure comprised two residential floors (ground and first floor) with the only

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laundary, bath and toilet facilities placed at lower ground level. They could only be approached by external steps at the rear of the front section of the building. Because of the external steps, the rear section of the ground floor, which accommodated the kitchen facilities, and the floor above it had an internal width substantially less than 3 m (10 ft).

2. As was to be expected, having regard to the age, design, siting and condition of the property, it provided what was not regarded as ``highly desirable'' accommodation. Investigations by the applicant indicated that for a period of some 18 years prior to August 1980 the one family had resided there as tenants. When those tenants moved to new council accommodation the owner determined to sell the property. Without creating a new tenancy, he proceeded to place the property on the market. From that point it was to remain unoccupied until March 1981.

3. The applicant described himself as a merchant banker. He was interested in the acquisition of residential properties. On 5 December 1980 he contracted to purchase Harris Street for $50,000. I am well satisfied that before contracting to buy he recognised that it would be necessary to incur substantial expense in order to place the property in the condition in which he desired to hold it. For that reason he retained the services of a builder/planner who was willing to design and to effect renovations of properties. The applicant had plans prepared and caused them to be lodged with the council for planning approval on 23 December 1980. That was done with the consent of the vendor. I am satisfied that, at that point of time, the applicant believed that the cost of the works then proposed would be something of the order of $25,000 and I am satisfied that, at the date he contracted to purchase, he was satisfied that the proposed cost would be at least of the order of $20,000. I also find that, as at 15 December 1980, it was his intention that the proposed restoration work would be carried out before the premises would be let to any tenant.

4. I find that the purchase of the property was completed in February 1981, at which date building approval was still awaited. At or about that time the applicant met a university student who was keen to occupy the premises or so much of them as were going to be available for his use. As a result, the student entered into possession under a residential lease for a period of six months from 2 March 1981 at a rent of $40 per week. On 19 March 1981 the council gave its approval to the proposed renovations. However, I find that the restoration program commenced before that date. I find that on 6 March 1981 custom-built windows were ordered and that, commencing on 9 March, three men started preparing the job. In six days, commencing 9 March, 132 hours were worked at a total cost of $1,760.

5. In the months following, substantial works were carried out. However, not everything went strictly according to plan and some significant modifications were made. At the lower ground level it had originally been proposed that an internal stairway should be erected from ground floor and that it would provide access to a laundry fitted with a shower and toilet and also provide access to a new, third bedroom which would open through new double doors on to the backyard. In the event, that program had to be modified. The result was that the proposed laundry/bathroom area came to be simply a storage area with no internal access from ground floor and the only plumbing there came to be a toilet facility sited close to the location of the toilet it replaced. At ground level, at the front of the building, the lounge was retained but with a new fireplace erected on a side wall and with the dividing wall modified to relocate the doorway leading to the room beyond. The room beyond was described as a dining room. The existing fireplace in that room was demolished and the walls made good; the stairway leading to first floor was made good; and the dividing wall to the rear section was modified to provide a new means of access. The rear section was modified to provide full kitchen facilities and a small family room area. A new external window was provided. An internal brick wall was removed and new double door opening and decking created at the rear. At the first floor level renovation of the veranda was deferred; the main bedroom at the front of the house was preserved; and the mid-section came to be the principal plumbed area in the property. The original plans for the mid-section had proposed a walk-in wardrobe facility from the main bedroom but that area came to be given over to providing the laundry facilities which could not be provided at lower ground floor level. The new laundry came to adjoin the bathroom

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facilities (including bath, vanity basin and toilet) as originally proposed. The rear section, sited over the kitchen/family room was to become a second bedroom with an additional window set into the side wall. In addition, the galvanised iron roof was replaced; flooring was replaced where sections had rotted: plaster walls were made good; the deteriorating external stairs were replaced by timber stairs of the same style; and the wet areas and basement areas were rendered impervious to moisture by the laying of reinforced concrete. Outside the main structure of the house an old shed was removed, leaving exposed a common brick wall. The substantially rotten paling fences to the rear of the brick sections of the boundaries were wholly replaced by the provision of a paling fence, different only in that it was capped. A roller door was fitted on the rear boundary. Within the yard some 6in. by 6in. posts were set with horizontal beams extending to the specially heightened posts of the paling fence to create what was referred to in the plans as a ``pagola'' [sic]. Internally walls were partly demolished within the kitchen/family room area and between the lounge and dining room at ground level. External walls were modified where new double doors (lower ground and ground floor) and windows (ground and first floors) were located.

6. I am satisfied that, at the end of September 1981, none of the relevant works remained in any substantial respect incomplete. By 2 September 1981 the tenancy of the student had come to an end and new tenants were found. I find that, in its renovated condition, good tenants (as the new tenants were) were available who were willing to pay approximately $578 per month rent. As a result, by 30 June 1982 the applicant had derived a rental income from this property of $5,520 (before commission $253.50).

7. The renovations were not achieved without considerable cost. I find that the amounts paid: the dates upon which they were paid: and the persons to whom or for what the amounts were paid were as follows:

      12 May        1,000.00               Builder
      14 May        2,000.00                  "
      27 May        3,500.00                  "
      5 June        3,921.10                  "
                    3,600.00               Plumber
                      946.00               Tiler
       3 July         513.00                  "
      27 July         240.00                  "
      23 July       1,467.41**             Builder
       7 August       300.00               Plasterer
      21 August       288.00                  "
       3 September  3,160.00               Painter
       8 September    604.50*              Fencer
      27 October      650.00**             Electrician
         October      826.86               Builder
      18 December   2,500.00                  "
                    1,708.60**                "
       5 February     130.25                  "
                       19.70               Bankcard - Materials
                       30.52                  "           "
                       22.00                  "           "
                       10.68               Cash           "
                      149.16               Bankcard       "
                        3.60               Cash           "
                      120.00               Unspecified    "
                      275.90                  "           "

*One neighbour made a contribution of $132.50 reducing net cost to $604.50. The other did not contribute.

**The claim for $850 was reduced by a set-off of $200 for damages occasioned to a bath.

***A payment of $700 to the builder to repair damage caused by water penetration was brought to account as a p. 2 item ( but was exceeded by a set-off for $705 as an insurance recovery.

8. The question arising for determination out of this not uncommon story of inner-city renovation is to what extent, if any, losses and outgoings were incurred during the year of income ended 30 June 1982 on the part of the applicant so as to constitute allowable deductions, either pursuant to the provisions of sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act''), which provides:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

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or pursuant to sec. 53, which provides:

``(1) Expenditure incurred by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied or used by him for the purpose of producing assessable income, or in carrying on a business for that purpose, shall be an allowable deduction.

(2) Expenditure incurred upon repairs to any premises or part of premises not so held occupied or used shall not be an allowable deduction.''

9. To establish such a claim, the applicant bears the onus of proving on the balance of probabilities:

  • • what the work alleged to give rise to the claim was;
  • • that that work constituted ``repairs'';
  • • that the cost of such work did not constitute repairs of ``initial defects'' such as would be considered to be an element of the capital expenditure incurred in acquiring and establishing the property;
  • • what the cost of doing that work was; and
  • • that the costs were incurred during the year of income ended 30 June 1982.

10. Determining in what amounts any part of the claim in dispute should be allowed presents special complications. The total cost of the renovations of the property in so far as they were incurred over the years of income ended 30 June 1981 and 1982 were said to be, and to be spread, as follows:

      Year ended 30 June 1981       14,967
      Year ended 30 June 1982       23,020
                        Total      $37,987

On the advice of his accountant no part of the $14,967 expended in the year of income ended 30 June 1981 was claimed as an income tax deduction. Of the amount said to have been expended in the year of income ended 30 June 1982 $18,483 of the total of $23,020 was claimed as a deduction in the return. The details presented with the return commenced on one page (``the p. 1 items'') and continued to completion on the following page (``the p. 2 items''). So presented the claim was made up as follows:



                                 $         $
      Fences                  737.00
      Less contribution from
         neighbour            132.50     604.50
      Painter                          3,160.00
      Plasterer                          588.00
      Electrician                        650.00
      Tiler                              753.00
      Door handle                         19.70
      Locksmith                           30.52
      Bathroom basin                      22.00
      Bathroom mirror                     10.68
      Builder                          4,012.00
      Builder                          4,586.00
      Builder                          1,584.00



         brought forward                     16,020.40
      Light fittings                            149.16
      Builder                                   848.00
      Builder                                 1,467.41
      Hardware                                    3.60
      Builder                                   700.00
      Less insurance recovery --
        water penetration                       705.00

That calculation was but part of the total calculations presented in the return of income which showed:

      Assessable income                  $
      Rent -- Harris Street            5,520
      Rent -- two other
        properties                     9,767
      Other Assessable Income
        (incl. salary $26,995)        35,893
      Less deductions:
      Repairs and Maintenance
       -- Harris Street               18,483
       -- Other properties             1,349
      All other deductions            22,659
      Taxable income as returned      $8,689

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The item ``all other deductions'' included many undisputed claims in relation to the rented properties.

11. The return so prepared was lodged with the Commissioner in February 1983. On 25 February 1983 the Commissioner issued his assessment of the taxable income of the applicant to 30 June 1982. He assessed taxable income as returned at the sum of $8,689. Then, on 12 September 1984, the Commissioner issued an amended assessment. An adjustment sheet which attended the notice of amended assessment showed that taxable income returned had been adjusted as follows:

      Taxable income returned           8,689
      Repairs to Harris Street
         property disallowed as
         capital expenditure in view
         of additional information
         provided                      16,020
      Taxable income as assessed      $24,709

12. It was common ground at the hearing that it had been the intention of the assessor that the taxable income returned should have been increased by $18,483: the total of the expenditure claimed in relation to repairs on Harris Street. It was also common ground that his error lay in failing to bring to account the p. 2 items. The contention for the applicant was that the only items in dispute were the p.1 items. Initially, it was asserted for the Commissioner that no relief could be granted to the applicant unless he established that the allowable deductions relating to repairs to Harris Street exceeded $2,463: the sum of the p.2 items - the further claims which, on the view of the Commissioner, should not have been allowed. When the question was raised as to why the Commissioner should be allowed to rely on such assertions instead of following the alternative course open to him of issuing an amended assessment, the representative of the Commissioner determined to abandon the contention. In view of the concession, it is not necessary to proceed to any consideration of entitlement to deductions in relation to the p. 2 items although evidence in relation to them needs to be taken into account in assessing the evidence relevant to the p. 1 items.

13. The p. 1 items fall into three categories:

  • (a) amounts paid to the builder;
  • (b) amounts paid to other contractors; and
  • (c) amounts paid for materials.

14. The first difficulty in evaluation of the available evidence is that none of the workers or contractors gave evidence. In consequence there was no direct evidence as to what was done; or when; or at what cost, except in so far as the applicant was able to speak in general terms. Instead the applicant sought to prove all that needed to be proved by the evidence of his recollection supported by the presentation of the first of two plans; invoices and accounts; and banking records. (The latter were not received in evidence as the relevant matters were noted by agreement.) His accountant also gave evidence explaining how the claim had come to be made up.

15. I am satisfied that the explanation as to how the claim came to be made in the sum mentioned was as follows. The applicant was a person who conferred frequently with his accountant and who kept his accountant well informed of his activities. When restoration commenced the arrangement with the builder was quite informal. Nothing was documented and the applicant advanced moneys to the builder as they were called for. He did not pay in advance or upon the presentation of the invoices which were prepared by the builder during that period. I find that the builder was maintaining invoices which he prepared from time to time, but which were not delivered promptly. The view of the accountant was that expenses of renovation incurred prior to 30 June 1981 were not deductible. In consequence, no claim to any deduction was made in relation to expenses incurred to 30 June 1981. The date upon which that return was presented was not disclosed in evidence but I find that it was only presented after all, or virtually all, of the works of renovation had been done and, more probably than not, after all moneys save $130.75 had been paid in relation to those works.

16. But the view of the accountant was, and I am well satisfied that it was a view honestly held, that costs incurred during the 1982 year of income relating to ``repairs'' - as distinct from improvements - would be deductible. His difficulty was how to obtain sufficient particulars of the work done to enable him to make a judgment responsibly as to what should

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be claimed. He requested the applicant to have the builder present his accounts in a sufficiently detailed form to enable the accountant to make that analysis. As a result, the accountant sought to communicate his understanding of the relevant principles of law to the applicant so that the applicant could in turn communicate those views to the builder so that, in turn, the builder could correctly apply those principles in the formulation of the accounts, at least presenting sufficient detail to enable the accountant to claim that any particular segment of the account was either wholly allowable or not allowable as the case might be. In some sense then, to the extent to which a claim was made for deductions, the Tribunal is being asked to find that the representations of the builder in the accounts presented relating to the year of income ended 30 June 1982 accurately express the cost to the applicant of having done the works described in each of those accounts. As there was no suggestion made on behalf of the Commissioner that the builder might have weighted the distribution of his total claim so as to attribute to deductible items a more than fair share of the total cost. I am persuaded on the balance of probabilities that I should accept that, in as much as the applicant paid the accounts as presented, the amounts paid should be considered as having been accurately apportioned. The question which remains to be determined is whether what was paid for the works in relation to which the claim was made constitute allowable deductions.

17. I now proceed to summarise the accounts and the information contained in them, bearing it in mind that I accept that the invoices of the earlier period were not presented to the applicant before he made his initial payments. However, the evidence is confused and remains unclear. The invoices prepared in numerical sequence (1-18) on a near-weekly basis from 6 March 1981 to 7 June 1981, and thereafter in July, August and September account for $30,215.57 ($27,921.30 to 30 June). But payments were said to only amount to $27,094.22. The invoices numbered 27, 58 and 67 were prepared at the request of the accountant and reconcile to the $12.500 paid on 18 December 1981, although a further $1,708.60 was paid the same day and a final $130.25 two months later. I am not persuaded that the early invoices give an accurate picture of what work was done and when, but I also accept that payments were made as claimed. The evidence disclosed the following in relation to the builder:

   Date        Invoice No.          Amount          Total        Payments
                                       $              $              $
  6.3.81            1                906.00          906.00
 14.3.81            2              2,005.90        2,911.90
 21.3.81            3              3,026.35        5,938.25
 28.3.81            4              2,362.14        8,300.39
  5.4.81            5              2,448.27       10,748.66
 12.4.81            6              1,913.78       12,662.44
 19.4.81            7              1,933.17       14,595.61
 26.4.81            8              1,865.61       16,461.22
  3.5.81            9              1,829.48       18,290.70
 10.5.81           10              1,734.98       20,025.68
 12.5.81                                                          1,000.00
 14.5.81                                                          2,000.00
 17.5.81           11              2,471.73       22,497.41
 24.5.81           12              1,618.91       24,116.32
 27.5.81                                                          3,500.00
 31.5.81           13              1,561.95       25,678.30
  5.6.81                                                          3,961.10
  7.6.81           14              2,243.00       27,921.30
 10.6.81        15-16              1,467.41       29,388.71
 23.7.81                                                          1,467.41
    8.81           17                517.41       29,906.12
 13.9.81           18

              309.45       30,215.57

   Date         Invoice No.         Amount          Total        Payments
                                       $              $              $
    10.81                                                           826.86
 15.10.81           27             4,012.00*          --
  3.12.81           58             5,436.00*          --
 10.12.81           67             3,052.00*          --
 18.12.81                                                        12,500.00
 18.12.81                                                         1,708.60
     2.82                                                           130.25

*In total accounting for $12,500 paid 18 December 1981.

18. I accept that, putting aside a possible advance to enable the builder to make a payment on account for the supply of window frames, at no time was the builder paid in advance for his services. Further, I find that towards the end of the job the indebtedness of the applicant to the builder was quite substantial and that that indebtedness was not satisfied until payments were made in December 1981. I accept that the subsequent payment of $130.25 was by way of meeting a claim belatedly made by the builder to be indemnified in relation to a particular expense. I am not able to find what that expense was. As to the other contractors. I find that their accounts were presented on the whole promptly at the completion of works and paid quite promptly.

19. The final category of expense relates to the acquisition of materials independently of the builder and other contractors and something of the progress of the works can be discerned from a consideration of the dates of acquisition. At one point it seemed likely that the question would arise as to whether, in relation to transactions processed through Bankcard, for income tax purposes the liability for $22 in relation to the transaction of purchase of 20 June 1981 was ``incurred'' on the signing of the Bankcard voucher or upon the satisfaction of the Bankcard account in the following fiscal year. After consideration, the Commissioner's representative determined not to pursue the matter.

20. In the circumstances so described, as I have found them to be, the argument for the Commissioner contends that it is not necessary to make any more particular or more detailed findings as to what was done; by whom; when; and what was paid for such work; or when it was paid. That is because, according to the Commissioner, all of the expenditure in the renovation of the property constituted an outlay of capital. As Lord Sands said in
The Law Shipping Co. Limited v. I.R. Commrs (1924) 12 T.C. 621 at p. 627:

``Repairs necessary at the time of purchase to render the subject of purchase serviceable fall to be added to the initial cost as a capital charge. Upon ordinary business principles this outlay appears to me to be properly a capital charge.''

The Commissioner argued that the expenditure so outlaid was to rectify ``the initial defects'', as they were described by Woodhouse J. in
Collector of I.R., Cook Islands v. A.B. Donald Limited (1965) 14 A.T.D. 152 at pp. 155-156. His Honour in that case said:

``When this general principle is applied to the present case the issue becomes one of deciding whether the expenditure upon the (property) is part of the (taxpayer's) organization of capital in order to earn profits with (it) or whether it arises from causes associated with the course of operations embarked upon for that purpose. In this regard nobody would doubt that to maintain such an asset which otherwise would deteriorate by its use in operations directed to produce income is a revenue charge. Work of this sort is done to preserve the asset, and following the work the character of the asset is left unchanged. But equally clearly the initial purchase of the asset involves an outlay of capital - it is a part of the organization of capital by the taxpayer to enable income-producing activity to be carried out. How then must one label an expenditure which remedies some flaw in the asset existing at the time of purchase? To me there can be only one

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answer. To the extent that such initial defects are restored, the result is an improvement in the quality of the asset purchased and, in my opinion, there has been an outlay of capital. To treat this outlay as a revenue loss is no more justified, in my opinion, than to treat the value of the improvement as an income gain... It follows, therefore, that I take the view that the restoration of defects in an asset cannot be classed as revenue charge unless the defects have arisen out of the taxpayer's application of that asset in his search for income and unless the work is limited to those defects and does not become enlarged into such a reconstruction that a permanent improvement in quality has been effected.''

The passage was later quoted with approval by Windever J. in the High Court of Australia in
W. Thomas & Co. Pty. Ltd. v. F.C. of T. (1965) 115 C.L.R. 58 at p. 73.

21. For the applicant, counsel contended that it was not so and that the cases on the subject of ``initial repair'' are not relevant. It was argued for the applicant that the property was acquired to be let at a rent as a residential property, and that it was so let, and that it did produce income at all material times. The argument is that, once the property had become income-producing for the applicant, the costs of ``repairs'' thereafter became deductible to the applicant, even though the need for such repairs may have been occasioned by use over a prolonged period ultimately resulting in the need to rectify by repair. In support of that contention, counsel pointed to a particular passage in a decision of mine, reported as Case V167, 88 ATC 1107. The passage relied on was one in which I had said:

``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.''

In due course I shall refer to the context in which the observation was made in order to explain it.

22. My view is that as the evidence stands before me the submission for the Commissioner is correct. When the applicant acquired the property the things which were later done needed to be done promptly in order to bring it into the condition in which the applicant desired to have the property for its planned long-term use. As such, the expenses of renovation were costs of acquisition, whether they were costs of entirely new work or improvements (as, for example, with the bathroom at upper floor level); or whether they were ``repairs'' (as with the replacement of the roof or of defective floorboards). It is not to the point that, at the date of acquisition, the premises were not so decrepit as to be incapable of generating assessable income. It is no answer to the contention for the Commissioner to prove that the premises were habitable, or even that in the conditions of the market place they were capable of being let, and that they were let for residential purposes and, by the letting, generated assessable income. That that is so is demonstrated by the Law Shipping case itself in that the vessel did perform one revenue-earning voyage before the major repairs in question were carried out. That circumstance did not alter the character of those repairs relative to the purchase. The question of ``initial repairs'', perhaps more aptly referred to as the cost of ``rectifying initial defects'', is not a question to be determined by findings as to whether the expenditure preceded or followed the derivation of income from the property. Nor is it a question of measuring the temporal relationships between date of acquisition and date of expenditure. There is no rule that costs of repair incurred during the first six or 12 months are not allowable as deductions; or that those incurred later are allowable. If the student tenant had held a house-warming party on the first night of his occupation and every window had been broken and the paintwork covered with graffiti, the costs of making good the damage done would have been allowable as costs ``incurred in the course of'' deriving assessable income by way of rent from that student tenant. But, as the evidence was that no ``damage'' was ever occassioned by the student, it follows that there was nothing which was done which was attributable to his occupation.

23. However, what can be said is that the need for some of what was done to be carried out was occasioned only by long-term deterioration: a deterioration which had advanced to a point where, as a matter of practicality, something needed to be done - something which needed to be done before the installation in question became wholly unfit for

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its purposes. Replacement of the roof provides one example; replacement of the electrical wiring another. Neither had deteriorated to the point of functional failure. The roof kept the rain out and the electrical wiring effectively delivered power. In neither case had there been any damage occasioned by any particular event or on any particular date such that one could say that what thereafter needed to be done had not needed to be done prior to that event, or that date, or upon the acquisition of the property. Nor had there been any such damage in any other case. (I except the matter of repair of water damage for which insurers provided indemnity.)

24. That was the point of the decision in Case V167 (ante). The case involved claims to deduct the costs of replacement of roof and spouting; replacement of kitchen cupboards: replacement of a window; and rewiring. The house had been built during the 1950s and was occupied by the parents of the taxpayer until October 1977. By arrangement with his parents he purchased the property from them in 1970; he concluded his payment of the price in 1975; the transfer of title was effected to the taxpayer and his wife in 1977; and thereafter it was let to tenants. The works in dispute were carried out during 1982. Having determined that the expenditure on the roof and spouting and on the electrical wiring were neither improvements nor ``initial repairs'', I proceeded to deal with a particular argument advanced on behalf of the Commissioner. It was that:

``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 to 1981) out of some 30 years (1951 to 1981) the expenditure was substantially attributable to a period of many years before the derivation of assessable income and therefore not allowable.''

Of that argument I said - taking the opportunity to correct a grammatical error -

``I accept that most things commence to deteriorate from the date of their construction and, in that sense, the need for most repairs can 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 and expense in 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 use 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.''

25. Those observations need to be understood in the context which gave rise to them. With that in mind, I do not consider that the observations there made support the cause of the applicant. As I have explained earlier in these reasons for decision the costs of remedying ``initial defects'' do not cease to be such because some income happens to be earned before the liability is incurred. The point in Case V167 was that, where an expense of repair is incurred ``in the course of'' income-producing activity and not by way of remedying ``initial defects'' or effecting ``initial repairs'', the entitlement to a deduction is not to be lost only because what occasions the need for the repair is deterioration; and that that deterioration is attributable to a period which includes a period prior to the acquisition of the property by the taxpayer.

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26. The conclusion of the Tribunal is that the determination of the Commissioner upon the objection under review should be affirmed.

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