Edited version of your written advice

Authorisation Number: 1013139642260

Date of advice: 21 December 2016

Ruling

Subject: Income tax: Deduction for repairs

Question 1

Are the costs incurred by the taxpayer in respect of works undertaken on the lifts in the building it owns deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

2014-15 income year

2015-16 income year

2016-17 income year

The scheme commences on:

The scheme has already commenced

Relevant facts and circumstances

The taxpayer owns a building constructed approximately XX years ago.

The taxpayer leases the building for market value rental.

Works were undertaken on the original lifts within the building as the lifts were delivering reduced reliability and efficiency.

The maintenance contractor was facing an increasingly difficult task to source parts for the lift. Spare parts were sourced from other old installations or had to be manufactured separately to keep the lifts running.

Substantial works were required to restore the efficiency of function of the lifts including works to the lift car doors and landing doors, the machine room, the lift car interior; and the operating panels.

Specific components had to be replaced with their respective newer equivalent as old components were no longer available.

Some cosmetic changes have been made in the process of the works

Modern parts have made some improvements to the lifts that are equivalent to the common standard of the modern day version including, for example, increased speed and smoother operation of the lifts; and bringing the lifts into line with current Australian standards.

The expenditure on the works was incurred by the taxpayer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10.

Reasons for decision

Section 25-10 of the ITAA 1997

Under section 25-10 of the ITAA 1997 you can deduct expenditure incurred 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 provided the expenditure is not capital in nature.

Where the property is partly used for an income producing purpose, you can only deduct so much of the expenditure that is reasonable in the circumstances.

The premises (or property) held for the purposes of producing assessable income is the building which the taxpayer owns and leases at market rates

The taxpayer has incurred expenditure in relation to works done on the lifts. The questions to be answered are therefore:

● are the works undertaken a 'repair' of the building for the purposes of section 25-10 of the ITAA 1997?

● if the works are a 'repair', is the expenditure incurred capital in nature?

Are the works undertaken a 'repair'?

Taxation Ruling TR 97/3 Income tax: deductions for repairs (TR 97/3) explains when expenditure incurred by a taxpayer would be an allowable deduction under section 25-10 of the ITAA 1997.

The word repair takes its ordinary meaning and means to remedy or make good defects in, damage to, or deterioration of, property to be repaired.

A repair involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition.

Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred over time by ordinary wear and tear. Repairs that give rise to a minor and incidental degree of improvement, addition or alteration may still constitute a repair.

Repairs that give rise to a substantial degree of improvement, addition or alteration will constitute an improvement and not a repair. Indicators of an 'improvement' include work done to extend the property's income producing ability, significantly enhance its market value or extend its expected life.

In relation to the use of different materials and technological advances or enhancements and whether works constitute a 'repair' or an 'improvement', what is determinative is the impact had on the previous efficiency of function of the property. As a general proposition, the greater the work enhances the efficient functioning of the property, the more likely with will constitute an improvement rather than a repair.

Where repairs are undertaken to satisfy regulatory requirements, a deduction will be available under section 25-10 of the ITAA 1997 provided the work remedies a defect in, damage to, or deterioration of property, restores the efficiency of function, does not produce a new or different function nor add a function and is not capital in nature.

Determining what constitutes a 'repair' is ultimately a question of fact and degree having regard to:

● the appearance, form, state and condition of the property at the time the expenditure is incurred; and

● the nature and extent of the work done to the property.

The works undertaken restored the reliability and efficiency of function of the building without changing its character.

Given the works undertaken were on the lifts, any improvements to the building stemming from the use of new materials and technological advances in the lifts would be minor or incidental rather than significant. In addition, the works undertaken did not extend the building's income producing ability and would not significantly increase the building's market value or extend the building's expected life.

It therefore follows that the works undertaken on the lifts are a 'repair' for the purposes of section 25-10 of the ITAA 1997 and not an 'improvement'.

Are the repairs of a capital nature?

A deduction is not available where the expenditure incurred is of a capital nature. Expenditure will be capital expenditure if:

● it establishes, replaces or enlarges the profit-yielding structure

● it is a reconstruction of the entirety; or

● the expenditure is incurred in putting an asset acquired that was not in good order into good order.

In respect of the term 'entirety', where something is part of a building, the building is the entirety.

The expenditure incurred by the taxpayer does not satisfy any of the above criteria and is therefore not capital expenditure.

Conclusion

The works undertaken constitute a repair to the building.

As the expenditure incurred on the works is not capital in nature, the taxpayer is entitled to a deduction under section 25-10 of the ITAA for the repairs.

If the building is entirely used to produce assessable income, the taxpayer will be entitled to deduct the full amount of expenditure incurred under section 25-10 of the ITAA 1997.

However, if the building is only partly used for an income producing purpose, the taxpayer will only be able to deduct so much of the expenditure incurred as is reasonable in the circumstances under section 25-10 of the ITAA 1997.