Using relevant legislation, cases and rulings, prepare a detailed file note discussing whether or not the expenses can be deducted and if so, in what year.

Part B 

Prepare a letter of advice to a client explaining what you have discussed in Part A such that Holly, a person who has no tax knowledge would understand when and why the expenses can be deducted.

For this section it is not necessary to use referencing but must be addressed and written to professional standards.

Answers

Part A: 

The taxation ruling of 97/23 is concerned with claiming allowable deductions for cost incurred in repairs on the property. The ruling evidently brings forward that expenditure that is incurred in context of the repairs can be claimed as the allowable deductions under section 25-10 of the ITAA 1997. As evident from the current case study it is understood Holly incurred an expense on numerous items and an allowable deduction can be claimed by Holly in context of the section 25-10 for the repairs performed to the premises.

Holly reported an expense on carpenter to fix the woodwork in the house. Therefore, such repair involves restoration of the efficiency of the property that was being repaired without changing the character of the property. In the present context cost incurred for woodwork represents restoration of the property and an allowable deduction can be claimed under section 25-10 for occurrence of such cost. As held in the case of BP Oil Refinery (Bulwer Island) Ltd v. FC of T 92 making a property good from damage or deterioration along with the renewal of parts does not represents an entire reconstruction. Therefore, the expenditure incurred on dishwasher repair and carpenter can be claimed as allowable deduction under section 25-10 of the ITAA 1997.

The taxpayer in the present context incurred an expenditure on the cost relating to electrician for installing new smoke detectors and by replacing all the missing light globes that were not working. The cost incurred by Holly represents an improvement that is made to the property as the result of technical advancement. It represents an incidental improvement that is made to the property for the overall functions of the property and such repair expenditure remains deductible under section 25-10 of the ITAA 1997.

The taxpayer reported an expenditure on installation of new cistern. As held in the case of Lurcott v. Wakely & Wheeler [1911] the judgement stated that renewal or replacement of the defective parts from the defective parts or the renewal or the replacement of the substantial part as the whole. Therefore, the occurrence of cost on the installation of the new cistern represent an improvement and an allowable deduction cannot be claimed by Holly in such context.

The taxpayer Holly bought forward an instance of expenditure that is incurred in painting the entire property in order to restore the property to the original condition. Therefore, the cost that is incurred in the present context represents that restoration of the efficiency of the function of the property. As held in the case of W Thomas & Co Pty Ltd v. FC of T (1965) repairs and improvement may in some circumstances represents a contrasting concepts.

Repairs involving a restoration of the thing to the former conditions it formerly had without making the change in the character of the property. However, in circumstances where restoration of the efficiency or functions instead of exact repetition of form or material which is significant a deduction might not be available. Similarly, in the present context the cost that is incurred in repainting can be claimed as the allowable deductions under section 25-10 since it was the restoration of the property to the original state and did not involve any change in the character of the property.

The taxpayer further bought forward the instances that cost was incurred for plumber relating to repairs to the hot water system. These cost are considered as the permanent fixtures that is installed in the premises for the purpose of income tax and a deduction can be claimed under section 25-10. The cost incurred for plumbing represents that they are incurred for replacement of the worn out unit by the new unit that ideally helps in restoring the efficiency of the functions of the property and cannot be seen as the improvement.

An important consideration that can be bought forward in this context is that replacement of worn out by the new unit that is identical to merely restoration of the efficiency of functions and not an improvement to the property. On the other hand, if the work of repair done that is beyond the entire cost of capital expenditure then no amount of allowable deductions under section 25-10 of the ITAA 1997. Similarly, the cost that is incurred on repairs by Holly can be considered as allowable deductions under section 25-10 of the ITAA 1997.

Part B: Letter of Advice

Dear Holly,

The current letter of advice is prepared in accordance with the transactions reported by you relating to the repairs that is incurred for the rental property. As evident from the current situation that you incurred an expenditure on carpenter for woodwork and also for dishwasher repair. In accordance with the definition provided under the section 25-10 of the ITAA 1997 you can incur expenditure on repairs will be considered as the allowable deductions. Similarly, the cost that is incurred by the taxpayer for the repair of dishwasher can be claimed as the allowable deductions.

You further reported expense on technical advancement by incurring cost on installation of smoke detectors and replacement of the missing light that did not worked. Under such circumstances an allowable deduction can be claimed by you for expenditure that is associated with the repairs of the property.

The cost that is incurred by you in remedying and making the property good from the damage or deterioration to be repaired in order to contemplate the continued presence of the property. As a result of the repairs carried out by you were for the most part occasional and involves the restoration of damaged or deteriorated part of the property. Therefore, under section 25-10 of the ITAA 1997 an allowable deduction can be claimed by you for the expenses incurred.           

Reference List:

Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013

Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH Australia, 2013)

Sadiq, Kerrie et al, Principles Of Taxation Law 2014

Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)