Question

Homewards Pty Ltd, a resident company, is a retailer specialising in building materials and household items.

During the income year, Homewards Pty Ltd incurred the following expenses:

- $ 150,000 Wages

- $ 5,000 Local government fines

- $ 80,000 Interests repayments for a loan to pay running expenses

- $ 30,000 Super contributions for employees

a) Advise Homewards Pty Ltd whether or not it may deduct any of the above expenditures? Homewards Pty Ltd incurred the following expenses in relation to its business premises (the Building):

• Painting of the exterior of the Building at a cost of $30,000. The original paintwork had deteriorated significantly since it was previously painted four years ago and the new paintwork looked fresh and inviting.

• Re-surfacing of the loading dock area of the Building to make the floor significantly more durable and skid resistant. The cost of re-surfacing was $12,000.

• Replacement of 20% of the roofing tiles on the roof of the Building. Part of the roof was damaged during a freak summer storm. The cost of the replacement was $55,000 and the tiles used were very similar to the original tiles on the roof.

b) Advise Homewards Ltd whether or not it may deduct any of the above expenditures under section 25-10 ITAA97?

Answer 1

A.
NATURE OF EXPENSE	AMOUNT	DEDUCTIBLE OR NOT
1. WAGES	$ 150,000	DEDUCTIBLE
2. LOCAL GOVT. FINES	$ 5,000	NON – DEDUCTIBLE U/S 26-5 OF ITAA 1997
3. INTEREST REPAYMENT FOR A LOAN TO PAY RUNNING EXPENSES.	$ 80,000	DEDUCTIBLE U/S 8-1 OF ITAA 1997
4. SUPER CONTRIBUTION FOR EMPLOYEES	$ 30,000	DEDUCTIBLE

ANSWER B

NATURE OF EXPENSE	AMOUNT	DEDUCTIBLE OR NOT
1. PAINTING OF THE EXTERIOR OF BUILDING	$ 30,000	DEDUCTIBLE AS REVENUE EXPENDITURE.
2. RE-SURFACING OF THE LOADING DOCK AREA TO MAKE THE FLOOR MORE DURABLE & SKID RESISTANT	$ 12,000	DEDUCTIBLE AS IT IS REVENUE EXPENDITURE.
3. REPLACEMENT OF THE 20% OF THE ROOFING TILES	$ 55,000	DEDUCTIBLE AS REVENUE EXPENDITURE.

Capital Expenditure is not deductible U/S 25-10 ITAA 97. When the value of asset is INCREASED then the expenditure is termed as Capital Expenditure. In contrast, any expenditure that serves to restore or maintain, rather than increase, the value of an asset cannot be CapEx — it's simply repair or maintenance.