Nominal Repairs

Whether the extension of a mezzanine floor (nominal repairs issue) constitutes repairs for purposes of section 25-10 of the Income Tax Assessment Act 1997.

The extension of a mezzanine floor (nominal repairs issue) does not constitute repairs for purposes of section 25-10 of the Income Tax Assessment Act 1997.

The building in question was constructed in early 1950s. Since its acquisition by the taxpayer in the early 1980s, no significant repairs had been undertaken. The mezzanine floor was fatigued and as some termite infestation had occurred, it had been recommended that the area be demolished and rebuilt as part of an extension program intended for the building. The old mezzanine floor represented 25.17% of the total floor area involved in the project and the taxpayer proposed to claim this percentage of the total costs as relevant to repairs.

The character of a repair does not necessarily change because it is carried out at the same time as an improvement. If an extensive renovation or restoration project is undertaken, combining repairs and improvements, it is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation from the entire project, is a repair.

If individual parts of the total project can be characterised as repairs, and their cost can be reasonably quantified, those items are repairs. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements.

No deduction can be allowed for the 'notional repairs' (the amount that the repairs would have cost if undertaken separately). The 'repair' in this case is not undertaken with the improvement, it is part of the improvement. The cost of the improvement would be of a capital nature, and as such, no deduction could be claimed under section 25-10 of the Income Tax Assessment Act 1997.

In the High Court decision FC of T v Western Suburbs Cinemas Ltd (1952) 86 CLR 102, it was held that where, in lieu of effecting repairs to part of 'an entirety', that part which is replaced with something different, and is an improvement on the original part, no deduction is allowable for the amount, which it is estimated the repair of the part would have cost if repair had, in fact, been effected.

Therefore, no part of the extension to the mezzanine floor would be allowed as a repair. The extension has gone beyond mere repair of worn out parts and constitutes an improvement to a capital asset. The extension may, however, qualify as a deduction for capital works under Division 43 of the Income Tax Assessment Act 1997.