Question

Francis is an experienced businessman working in the hospitality industry for many years. He has recently purchased an old restaurant. The commercial kitchen in the restaurant was in poor condition. Replacing the whole commercial kitchen will cost Francis $23,000. The cost of repairing the kitchen appliances will be $4,900, however some parts may not be available in the market anymore as these appliances are too old and obsolete. Francis decided to replace the commercial kitchen with brand new modern appliances because new modern appliances in the market have better features and durability. Advise Francis on the deductibility of the above transactions. Your advice must be supported by reference to relevant legislation and principles of tax law.

Requirement

identification of material facts regarding Francis’s deductibility of the commercial kitchen expenditures in the given scenario, and the critical discussion of tax consequences relevant to the assignment question. 2 Marks

Identification and analysis of legal issues / legal question and relevant taxation law in regards to Francis’s deductibility of the commercial kitchen expenditures (e.g. ITAA 1936 and ITAA 1997). 5 Marks

Thorough yet succinct application of tax law (e.g. ITAA 1936 and ITAA 1997) to material facts in Francis’s deductibility of the commercial kitchen scenario. 3 Marks

Correct information and taxation law regarding the deductibility rules have been used and properly cited. A detailed analysis has been performed. 2.5 Marks

Detailed and accurate conclusions regarding Francis’s deductibility of the commercial kitchen expenditures are reached from the discussions. 2.5 Marks

Answer 1

Section 25-10, the word 'repairs' relates to work done to 'premises (or part of premises), plant, machinery, tools or articles'.

'repairs' has its ordinary meaning. It means the making good of defects, damage, deterioration.

A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.  Repair may involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance.

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.

If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.

What is a 'repair' for the purposes of section 25-10 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.

If work done to property goes beyond what is a 'repair' in terms of section 25-10, any expenditure for the work is not deductible. The work may go beyond 'repairs' in terms of the section if it:

1. changes the character of the property; or

2. does more than restore its efficiency of function.

Further on other hand there is concept of "initial repair" & Initial repairs are of a capital nature and not deductible

Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer

In the given case the case falls within the "initial repair".

Francis have purchsed old restaurant & that old restaurant is not in a running condition and requires substantial improvement. However some parts are not available & obsolete and on other than replacing whole kithcen have other business advantage as well that it brings additional feature.

In view of the same this is capital expenditure and not a revenue expenditure. The above disucssion is in line of tax ruling TR 97/23.