Deductions: repairs - restoration of leased premises

Is the taxpayer entitled to claim a deduction for the costs of removing fixtures and fittings from leased premises, under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) , where the lease requires them to return the premises to their original condition at the end of the lease?

No. The cost of removing fixtures and fittings is not considered to constitute a repair of the premises.

The taxpayer operated a cafe in a shopping centre and the lease was terminated.

One of the conditions of the lease was that on termination of the lease the lessee had to return the premises back to its original condition ready for the next tenant. This involved expenditure to remove tiles from the floor and walls, remove shelving, specialist lighting and other fixtures, and return the walls, floor and ceilings to an undamaged condition.

Section 25-10 of the ITAA 1997 allows a deduction for expenditure incurred for repairs to premises (or part of premises), or plant where the taxpayer held or used the premises or plant solely for the purpose of producing assessable income. However, expenditure of a capital nature is not deductible.

Taxation Ruling TR 97/23 explains the circumstances in which something will be considered to be a 'repair' and an allowable deduction under section 25-10 of the ITAA 1997. A deductible repair • is the remedying or making good of defects in, damage to, or deterioration of property in a mechanical and physical sense • contemplates the continued existence of the property

In addition, the repair must • not constitute an improvement that is of a capital nature • arise as a result of the taxpayer's income producing activities and • be separately identifiable. (FC of T v Western Suburbs Cinemas Ltd 86 CLR 102; 9 ATD 452; (1952) 5 AITR 300)

An essential character of a repair is that there is a continued existence of the item being repaired. If for example, wall or floor tiles are removed and destroyed, then the item does not remain in existence. Therefore such work would not constitute a repair. The removal of capital work (or the unimproving of the property) and any work associated with this which is required to leave the property in an undamaged condition, would be seen to be capital in nature and would not be deductible under section 25-10 of the ITAA 1997.

Note: Some site rectification costs and costs associated with the removal of tenant's fixtures incurred upon the cessation of business are examples of costs that may come within paragraph 40-880(1)(g) of the ITAA 1997.