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Can the taxpayer deduct expenditure on the replacement of kitchen cupboards installed in a rental property under the capital works provision of section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer can write off the expenditure under the capital works provision of section 43-10 of the ITAA 1997.

The taxpayer has owned and rented a residential property for many years. While the property was tenanted, the taxpayer replaced the old kitchen fittings, including the cupboards. The old cupboards had deteriorated through water damage and wear and tear.

The new fittings are of a similar size, design and quality as the originals. The new cupboards are of the same type and standard of material (or the modern equivalent of that material). The layout and design of the kitchen did not alter substantially from that of the original. The differences are: • the old sink was replaced with a smaller sink and, as a consequence, provided more bench top space; and • a removable cupboard replaced the space previously available for a dishwasher.

Broadly speaking, section 43-10 of the ITAA 1997 provides a deduction for capital expenditure on capital works used to produce assessable income. Capital works include a building or an extension, alteration or improvement to a building and includes the kitchen cupboards.

The kitchen cupboards are separately identifiable items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature (Lindsay v. Federal Commissioner of Taxation (1961) 106 CLR 377; [1961] HCA 93).

The cupboards are fixtures and, therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The cupboards are not in place simply by their own weight but are screwed to the walls of the building and they are fixed with the intention that they shall remain there indefinitely.

The deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Paragraph 43-70(2)(e) of the ITAA 1997 excludes expenditure on plant from construction expenditure.

The role and function of the cupboards in relation to the income producing activities do not go beyond being part of the setting of an income producing operation when they are installed in a residential rental property. As a result, they are not plant.

The expenditure on the kitchen cupboards is construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997. A deduction for the expenditure is not available under Division 40 of the ITAA 1997 because a deduction is available under Division 43 of the ITAA 1997 (see subsection 40-45(2) of the ITAA 1997).