Edited version of your written advice

Authorisation Number: 1012685815567

Ruling

Subject: Repair

Are you entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 for expenditure incurred in relation to a barn used in the course of your business?

No

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

A barn is used as part of your income producing activities.

The barn, which is located on another party's property, requires significant repairs. The owner of the property on which the barn is located is not prepared to carry out the necessary repairs to the barn.

You therefore intend to:

1. disassemble the barn,

2. relocate the barn to your property,

3. conduct the necessary repairs to the barn, then

4. reassemble the barn on your property.

The current location of the barn is unsuitable. Your intention is to move the barn to a location on your property where the risk of future deterioration is less.

The design of the barn, and the building materials used, allow for it to be disassembled in order to access parts that need replacing or correcting, and the building to be easily reassembled after the part is replaced or corrected.

The barn will be disassembled, some of the structure will not need to be completely disassembled, to effect repairs, as they could be safely lifted or lowered away from any danger area whilst the various upright support posts are corrected, and afterwards put back in their position.

The appearance, form and character of the building of the building will be the same (but likely to be slightly smaller).

The material, from which the barn is built, is the original material, the majority of which is designed to be easily lifted out by hand without any tools, and put back-in, just as easily.

You accept that the relocation is not repairs to the barn.

You have received a quote for $X (GST Incl.) for all the required work. Given the details in the quote you estimate that the repair portion is $Y (GST excl.) including materials of $Z. You have decided that you will now buy the parts and do the repairs yourself over time. The expenses will now largely comprise the material for new piers, and for some replacement beams to support the external walls, and any related building materials necessary to complete the repairs.

A written agreement was entered into a number of years ago between you and the owner of the property on which the barn is located. This agreement provides you with a licence to use the barn and you have used the barn since the agreement has been in place. Further, if any item is largely abandoned on the land of one of the parties and that party is proposing to destroy it, then the other party may relocate it onto their own land prior to its destruction.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Summary

The expenditure at issue is considered to relate to the construction of a barn on your property, and/or an improvement in the efficiency and life expectancy of the barn rather than the repair of an existing barn in its original location. The expenditure is therefore not deductible under Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed Reasoning

Your circumstances require the Commissioner to reach a conclusion as to whether or not the expenditure at issue can best be characterised as a repair to an existing structure or the construction of a new structure.

Repairs

Section 25-10 of the ITAA 1997 provides that you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

Taxation Ruling TR 97/23 Income Tax: deductions for repairs explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

• the extent of the work carried out represents a renewal or reconstruction of the entirety,

• the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or

• the work is an initial repair. 

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

An 'improvement', provides a greater efficiency of function in the property - usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

TR 97/23 provides that if work done goes beyond 'repair' and the whole cost is capital expenditure, no amount is allowable as a deduction under section 25-10 of the ITAA 1997 for 'notional' repairs, i.e., an amount it is estimated that repair work would have cost the taxpayer if the property had in fact merely been repaired.

Your circumstances

You have access to a barn on another party's property which is in disrepair; if that barn were to be repaired it is claimed it would have to be disassembled to allow key structural elements to be replaced. You intend to relocate the barn and reassemble it on your own property, with the replaced structural elements; and as part of the process, the barn is likely to be reduced in size and will be located in a more secure location.

You agree that the cost of transporting the disassembled barn from its current location to your own property would not be deductible. However, you consider the costs of disassembly and reassembly, as well as the cost of replacement materials should be allowed as a repair; arguing these costs would be incurred whether the barn was repaired in situ or reassembled elsewhere.

A barn is a structural improvement which forms part of the land upon which it is currently located. If it was being disassembled on one property and reassembled on a second property, that would constitute a structural improvement to the second property, not a repair of the original structure. The fact that the new structure will largely salvage the materials of the original barn does not change the fact that it will be a new structure from the perspective of the land to which it is moved.

In addition the relocation of this barn will result in an improvement. Currently the barn stands on ground which is not suitable. Moving the barn away from this would result in an improvement as foundations would be less prone to shifting and the floor of the barn less prone to damage.

Capital works which negates the need to do separate repair work cannot be notionally apportioned to allow a deduction for the cost of repairs that would otherwise have occurred. That is, although some of costs would be the same whether or not the barn was repaired in situ or moved elsewhere, these cannot be carved out of the capital costs of constructing what becomes an improved barn from the perspective of the property to which it is moved, and an improved barn because of its change in location.

Therefore, while some of the work to be undertaken remedies defects in, damage to, or deterioration of, the barn and may be a repair if it is maintained on its current location, the work in its entirety (dismantling, moving, repairing and reconstruction of the barn) is an improvement to your property and to the barn, and so the associated costs are not deductible under section 25-10 of the ITAA 1997.