interpretation statement: is 12/03 income tax ... · pdf file1 interpretation statement: is...
TRANSCRIPT
1
INTERPRETATION STATEMENT: IS 12/03
INCOME TAX – DEDUCTIBILITY OF REPAIRS AND MAINTENANCE EXPENDITURE – GENERAL PRINCIPLES
All legislative references are to the Income Tax Act 2007 (the “ITA 2007”) unless otherwise stated. Relevant legislative provisions are reproduced in the Appendix to this statement.
Contents
Summary ................................................................................................................................ 2
First stage – identifying the relevant asset .............................................................................. 3 Relationship with the depreciation rules .................................................................................. 4 Second stage – nature and extent of work done ...................................................................... 4
Introduction ............................................................................................................................. 6 Approach to deductibility of repairs and maintenance expenditure ............................................. 6 Flowchart - approach to analysis ............................................................................................ 7 Relevance of case law decided under previous legislation .......................................................... 8
Analysis ................................................................................................................................... 8 Is the expenditure deductible under the general permission? .................................................... 8
Nexus with income .......................................................................................................... 9 Examples – nexus with income .............................................................................................. 9 Does the capital limitation deny a deduction for the expenditure? .............................................. 10 What is the asset being worked on? ....................................................................................... 10
The “entirety test” – “a physical thing which satisfies a particular notion” .............................. 11 Applying the “entirety test” .............................................................................................. 13 Overseas authorities ....................................................................................................... 16
Key points on identifying the asset being worked on ................................................................ 18 Examples – identifying the asset being worked on ................................................................... 19 Relationship with depreciation rules ....................................................................................... 20 What is the nature and extent of the work done to the asset? ................................................... 20
General capital/revenue cases .......................................................................................... 21 Repairs and maintenance cases ........................................................................................ 23 Analysis of case law ........................................................................................................ 24
Key points on the nature and extent of the work done to the asset ............................................ 36 Examples – nature and extent of the work done to the asset ..................................................... 37
Other considerations from the repairs and maintenance cases .............................................. 39 Key points relating to other considerations from the repairs and maintenance cases .................... 50 Examples – other considerations from the repairs and maintenance cases .................................. 51
References ............................................................................................................................... 54 Appendix: Legislation ................................................................................................................ 55
Reader’s guide: This Interpretation Statement contains comprehensive analysis of the common law relating to the deductibility of repairs and maintenance expenditure. It is recognised that not all readers require this level of detail. To assist, the statement has been broken into parts with summaries and examples. In particular, the following may be helpful: The summary of general principles at paragraphs 1 to 27. The flowchart at paragraph 35, setting out how to approach resolving issues of
deductibility of repairs and maintenance expenditure. “Key points” summaries at paragraphs 97 (identifying the asset being worked on), 175
(identifying the nature and extent of the work done) and 232 (other considerations from the repairs and maintenance cases).
Examples illustrating the practical application of the principles discussed in each part. The examples immediately follow paragraph 49 (nexus) and each of the “key points” summaries at paragraphs 97, 175 and 232.
Sum
1.
2.
3.
4.
5.
6.
7.
8.
mmary
This Intea taxpayis on tanmake re“repairs Interpreindividuataken asrevenue
This Integeneral expenditon repaiBulletin following(Decembwhile proand “Ren
The Comexpenditstateme
A deductexpenditthat explimitatiocapital lilimitationot consapplicati
To qualifrepairs aassessabcarryingexcluded
The capimaintenin nature
Capital edeprecialoss will and any availabilInterpre
The courrepairs a
Thwo
erpretation yer to repaingible propeepairs or alt and mainte
etation Statal situations an indicat nature and
erpretation principles rture. It uprs and maiVol 5, No 9g items thaber 1995): operty vacantal proper
mmissioner’ture has nont.
tion for repture is dedu
penditure isns in s DA imitation inn) are beyosider any spion of the c
fy for a dedand mainteble income on a busind income.
ital limitatioance expene.
expenditureation rules i be availab improvemity or other
etation Stat
rts have deand mainte
e first stagorked on.
Statementir or maintaerty includiterations orenance expement also within thistion that thd deductibl
Statementrelating to tdates and ntenance e
9 (Februaryat were pub “Rental proant”; “Rentrty – deduc
’s view on tot changed
pairs and muctible und not exclud2. This Int
n s DA 2(1)ond the scopecific deducapital limit
duction undnance expe and/or excness for the
on in s DA nditure that
e is not dedin subpart le. Since tents to thorwise of a dement.
eveloped a nance expe
e is to iden
2
t considers ain their pring real pror to maintapenditure”. o uses this s statemente Commisse.
t restates tthe deductreplaces thexpenditurey 1994). Itblished in Taoperty – detal propertyctibility of in
the deducti in any sub
maintenanceer the gene
ded from deterpretation. The otheope of this uction provtation for ce
der the genenditure mcluded incoe purpose o
2(1) deniest satisfies t
ductible butEE. If thoshe 2011-20
ose buildingdepreciatio
two-stage enditure is
ntify the rel
the deductroperty. Thoperty. Expin assets is For ease oexpressiont the expresioner cons
he Commisibility of re
he Commisse published t also updatTax Informaeducting my – deductinterior rede
ibility of repstantial wa
e expenditueral permiseductibility n Statemener general listatement.
visions in Paertain types
neral permisust be incume, or be i
of deriving a
s a deductithe general
t will be suse rules are012 incomegs have a 0n loss is ou
approach f of a capita
levant asse
tibility of cohe focus of penditure ins commonlyof reference. Howeverssion’s useiders the co
ssioner’s viepairs and msioner’s ear in Tax Infotes and reption Bulletiaintenancebility of renecorations”
pairs and my since the
ure is allowession in s D by any of tnt is concerimitations ( This stateart D that os of expend
ssion in s Drred in derincurred in assessable
on for repa permission
bject to thee satisfied, e year, cert% deprecia
utside the s
or determinl or revenu
et that is be
osts incurrethis statemncurred to y referred te, this r, in any e should noosts to be o
ew of the maintenancrlier statemormation places the in Vol 7, Noe expenses novation co.
maintenance 1994
ed if the DA 1(1), andthe generarned with th(eg, the priement also override thediture.
DA 1(1), theriving the course income an
airs and n but is cap
e normal a depreciattain buildination rate. scope of thi
ning whethue nature:
eing repaire
ed by ment
to as
t be of a
ce ment
o 6 osts”;
e
d if l he ivate does e
e
e of d/or
pital
tion gs The s
her
ed or
9.
First
10.
11.
12.
Thto (PC
Howeverany partexpenditThe cour[1966] Acapital/rcircumst
t stage – i
As a maapplies ton mustto whethcontext questionearning coined tnotion” ((1999) 1entirety,not a suidentifiasomethiwider asdistinct. There is identified
When codeterminfor examHCA), H(HC), O’17 TC 93(IH (1 DCo (193distinct f(1983) 6connectisingle asshould bright (Po
SimilarlyidentifyiBay Electhing thalikely to physicalrelevantHawkes
e second st that asset C)).
r in adoptinticular situature is capirts favour tAC 224 at prevenue testances (Auc
identifying
tter of comto any repat be identifiher the worof the asse
n of fact, destructure ohe “entirety(Lindsay v 19 NZTC 15, guidance bsidiary pable as a pring is itself sset include However, a danger od (Poverty
onsidering wne whethermple, its locawkes Bay ’Grady (HM3 (KB), Sam
Div)), Margr5) 19 TC 4from other 6 NZTC 59,ion betweesset (Aucklabe consideroverty Bay
y, determinng the relectric, Hawkeat is integra be the relely capable t asset in a Bay Power
tage is to c(Auckland
ng this two-ation determtal or reventhe approacpage 264. sts, and alsckland Gas
g the relev
mmon senseairs and maed. This isrk undertaket identifiedegree and ior entity buy test” – “a FCT (1961)5,011 (CA))may be tak
art of anythincipal itema separate
es consideri a single asof distortion Bay Electri
whether sor the thing cation or siz Power Dist
M Inspector muel Jones rett (HM Ins81 (KB)). things mig897, O’Gran componeand Gas (Ced part of t Electric, Ha
ning somethvant asset es Bay Powal to a largevant assetof separate repairs andr).
3
consider the Gas Co Ltd
-stage appmining whenue in natuch of Lord P That is carso in applyi (PC)).
vant asset
e, in decidinaintenance s importantken is of a cd. Identifyimpression.
ut rather foca physical t) 106 CLR ). When coken from whing else, am of capital physical thing whethesset may bn if too largic v CIR (19
omething is can be sepze (Lindsaytribution Lt of Taxes) vs & Co (Devspector of Something
ght suggestady, Samueent parts wiCA)). Substhat systemawkes Bay
hing’s funct being work
wer, Case Ner asset’s at (Hawkes Be operationd maintena
e nature and v CIR (20
roach, the ether repairure dependPearce in Bre must be ng case au
t
ng whetherexpenditur
t so an assecapital or reng the rele. This is nocuses on whing which377, CIR v onsidering w
whether it isnd whether equipmenthing or simer it is physe made up ge or too sm999) 19 NZ
a distinct aarately ide
y v FCT (19td v CIR (19v Bullcroft Mvondale) LtdTaxes) v Lo that is phyt that it is ael Jones, Maill often be idiary parts
m rather tha Power).
tion may alked on (Auc
N8 (1991) 1ability to phBay Power) by itself is
ance contex
nd extent o00) 19 NZT
courts are rs and mains on the sp
BP Australiaused in appthorities to
r the capitare, the asseessment caevenue nat
evant asset ot about finhat the cou satisfies a Auckland Gwhether sos an entiretyr the thing t. Identifyiply a compically and f of interdepmall a subjeZTC 15,001
asset it mantified by p61) 106 CL998) 18 NZMain Collierd v CIR (19owestoft Wysically divia single assargrett). A relevant tos of an intean assets in
so be helpfckland Gas
13 NZTC 3,0hysically fu), while soms more likelxt (Poverty
of the work TC 15,702
clear that intenance pecific factsa Ltd v FCT plying the
o different
al limitationet being won be madeture in the is always a
nding a profurts have particular Gas Co Ltd omething isty by itself a is separateing whetheponent of a functionallypendent paect matter (CA)).
ay be helpfuphysical facLR 392 (FuZTC 13,685ries Ltd (19951) 32 TC
Water and Gisible and set (Case F6Also, a physo finding a egrated systn their own
ful when s (CA), Pove052). A smnction is no
mething thaly to be the Bay Electri
done
in
s.
orked as
a fit-
an and ely r
y rts. is
ul to ctors, ll Ct
5 932) 513
Gas
67 sical
tem n
erty maller ot at is e ric,
Rela
13.
14.
15.
Seco
16.
17.
18.
19.
ationship w
The prinfor repawhen ideThis beinrelating repairs a
In the Cdeprecia“Residenpropertywith theasset beidentifyicontext.purposeCommis
As was nbeing wodeprecia10/01 wtreated athemselv“commecommercases bepurposethat in tdepreciamaintenretrospe
ond stage
The secoexpenditor reven(Aucklanand exte
Repairs different“as new”asset maFor incorepairs aextent o
If the worenewal work wilv CIR [1905). Wreplacem
Expenditgood we
with the d
nciples that irs and maientifying anng the case to an item and mainte
ommissionable propertntial rental y” Tax Infor analysis in
eing repaireng the item Any assets by applyisioner as th
noted in IS orked on ination rules fwas releasedas separateves (see th
ercial fit-outrcial fit-out e different fs. It is antihe context
ation purpoance purpo
ectively from
– nature a
ond stage, ture is dedunue in naturnd Gas (PC)ent of the w
and maintet ways. Fo” condition,ay be reconme tax purand mainteof the work
ork done to of the assell be capita1968] NZLRWhether thement or ren
ture incurreear and tea
epreciatio
the courts intenance pn item of tae, when it c of tangiblenance purp
er’s view, tty in a resid properties rmation Bun this Interped or workem of deprect in a resideng the threhe relevant
10/01, simn a commerfor commerd) with the e items of dhe definitiont” in s YA 1 the asset ufrom the ascipated tha of commerses will be oses. It is am the 2011
and exten
when deteructible, is tre in the co), Lindsay)work done t
enance pror example, , or substannstructed urposes, the nance depe done to th
o the asset et, or substl expenditu
R 193 (SC),ere has beenewal will a
ed to repairr, that has
4
on rules
have devepurposes arangible procomes to ree property tposes will b
the analysisdential ren – Deprecia
ulletin Vol 2pretation Sed on. IS 1ciable propeential rentaee-step testt asset for
milar principrcial properrcial buildin intention tdepreciablens of “build1). This meused for desset identifat a legislatrcial fit-out similarly tranticipated
1-12 income
nt of work
rmining whto consider ontext of th. This is acto the asse
blems affec an asset mntial parts
using new a deductibiliends on a ce asset.
results in ttantially theure (Aucklan Lurcott v
en such a sulways be a
r or mainta the effect
eloped to idre the sameperty for deepairs and mthat is deprbe generally
s on how total property
ation of item2, No 4 (M
Statement o10/01 provierty in a resal property t in IS 10/0repairs and
ples apply wrty context.ngs were amthat items oe property, ing”, “com
eans that inpreciation ied for repation changet the relevareated as th that this ce year.
done
hether repa whether thhe asset idechieved by t.
cting assetsmay be repaof an asset
and sometimty of the exconsideratio
the reconste whole of nd Gas (PCWakely andubstantial r matter of
ain the asseof changing
entify the re principlesepreciationmaintenancreciable, thy the same
o identify ay context inms of depreay 2010) ison identifyindes a threesidential re identified f01 will be trd maintenan
when ident. However,mended in of commercdistinct fromercial bui
n the contexpurposes mairs and mae will be mant asset thhe asset fochange will
irs and mahe expenditentified as t considering
s can be reaired and ret may be remes differexpenditure on of the na
truction, repthe asset, t
C), Aucklandd Wheeler [reconstructfact and de
et, over andg the chara
relevant ass that applyn purposes.ce expendit
he asset for item.
an item of n IS 10/01eciable s consistenng the relee-step test ental properfor depreciareated by tnce purpos
ifying the a, the 2010 (aftecial fit-out om the buildilding” and xt of
may in somaintenance ade to ensuhat is used fr repairs an apply
intenance ture is capithe entiretyg the natur
esolved in restored to eplaced or aent materia incurred oature and
placement the cost of d Trotting C[1911] 1 KBtion, egree.
d above maacter of the
sset y ture r
:
t vant for rty ation the es.
asset
r IS be dings
e ure for nd
tal y re
an an ls. n
or that Club B
aking
20.
21.
22.
23.
24.
25.
26.
27.
asset wimaintainor subston revendeductib
When defactors tasset (Acapacityof the wthe workBalderst(PC and considerdone to (AucklanCinemas
The defefrom bei(SurveyoCollector
Repairs reconstrasset, orproject. single asNZTC 11
Where rand not from the16 NZTC
It is appbetweenBay Elec
There is repairs h
No deduasset upbusinessasset (Ladeductioasset if tasset wabe used Theatres
The natuas a resusame prevent asfocus is
ll also be cn the asset antially thenue accounble (Aucklan
etermining to consider uckland Ga
y, its useful ork done, ck done to thton (Survey CA)). Detration of ththe asset a
nd Gas (PC)s Ltd (1952
erral of reping deductior of Taxesr of Income
and mainteruct, replacr to change This is regsset or a gr1,361 (CA),
epairs and as part of oe effect thaC 11,290 (H
propriate ann deductiblectric).
no deductihad the wo
uction is allop to the cons. Such exaw Shippinon may stillthe purchasas in a stat as intendes Ltd v Jone
ure of the eult of a signrinciples mus are applieon the wor
apital expe without ree whole of tt, and is (snd Gas (PC
whether th are the naas (PC)). C life, functiocannot be rhe asset (Pyor of Taxesermining the extent ofand the bus), Case L68
2) 86 CLR 1
airs will notble expend
s) v Vickerse Tax, Bech
enance wore or renew e that assetgardless of roup of ass, Hawkes B
maintenanone overallt the work
HC)).
nd possible e repair cos
ion for a nork been car
owed for exndition necependiture fg Co Ltd v be allowedse price of e of disrepa
ed despite ites [1973] C
expenditurenificant eveust be applied to repairrk done.
5
enditure. Eplacing, recthe asset, osubject to aC)).
he work donture and th
Changes to on or operarelied on inPoverty Bays) (1889) 2he scale of f the work dsiness, as w8 (1989) 11102, Case N
t in itself cditure to cas Ltd [1915huanaland P
rk that form an asset, ot’s characte whether thets (Coloni
Bay Power,
nce expendil plan, the e done has o
in some sists and non
otional amorried out di
xpenditure essary for iforms part IR Commrsd for expen the asset wair, and whts state of Ch 288 (CA
e does not ent, for exaied to repars arising fo
xpenditureconstructinor without cany other li
ne is capitahe scale of an asset’s ating capac isolation to
y Electric, H2 TC 485 (I the work ddone, the imwell as the 1 NZTC 1,3N8, Hawkes
hange the cpital expen] 3 KB 267Protectorat
ms part of oor substanter will likelyhat project ial Motor CoCase X26 (
iture is incuexpenditureon the asse
tuations ton-deductible
ount that mifferently (P
incurred tot to be useof the capit
rs (1930) 12nditure on rwas not affehen the assdisrepair (O
A)).
change if thample fire, irs arising a
or other rea
incurred tog or renewchanging itmitations a
al in naturethe work dvalue, its e
city, whetheo establish
Highland RaIH (1 Div)),done includemportance cost of the 98, Wester
s Bay Power
character oditure (Oun, Rhodesia
te [1933] A
one overall tially the wy take its naconcerns wo Ltd v CIR(2006) 22 N
urred on ane should ta
et (Sherlaw
apportion e capital wo
might have bPoverty Bay
o bring a ned in the taxtal cost of a2 TC 621 (Irepairs to aected by thet was acqOdeon Asso
he repairs aflood or eaas a result asons (Case
o repair or wing the assts characterapplying)
, relevant done to the earning er or not a the natureailway Co v, Auckland es a of the wor work donern Suburbs r).
of repair consworth Railways L
AC 368 (PC)
project to whole of an
ature from work done oR (1994) 16NZTC 12,31
n ad hoc baake its char
w v CIR (199
expenditurorks (Pover
been spenty Electric).
ewly acquirxpayer’s acquiring thIH (1 Div))
a newly acqhe fact thatuired it couociated
are carriedrthquake. of a signifie F67). Th
set, r is
goal e of v Gas
k e
sts
Ltd v )).
that on a 6 15).
asis racter 94)
re rty
t on
red
he ). A uired
t the uld
out The cant e
Intr
28.
App
29.
30.
31.
32.
33.
34.
roduction
Since thexpenditGas), sigearthquarules. Inof the geNew Zea
roach to d
This Intedeductibexpenditpropertyin this Intradition
The Intedeductioexpenditstatemedenied b
The statThen, ondevelopethat part
If the woor renewcapital ereconstrwhole ofexpenditthat goecapital, ais not a the who
There aroverall pacquisiti
If the exexpenditdeductiofor the erequirem
n
e Commissture the cognificant evakes) and tn the Commeneral princaland and t
deductibili
erpretation bility of repture will ary which manterpretational capital/r
erpretation on for repaiture must bnt then con
by the appl
tement expnce the assed by case ticular asse
ork done towal of the aexpenditureruction, repf the asset,ture will bees beyond rand work dreconstructle of the as
re some exproject thaton conditio
xpenditure ture will beon). If the expenditurements.
sioner’s 199urts have hvents have there has bmissioner’s ciples relathe publicat
ty of repa
Statementairs and maise when soy be depreon Statemerevenue cas
Statement rs and maibe deductibnsiders howication of th
lains how tset is identif law for decet is capital
o the asset asset, or sue. If the woplacement o, then depee either caprepairs and done that dtion, replacsset) will be
ceptions, fot is capital ion of the as
is found to e denied (asexpenditur
e will be allo
6
94 statemeheard some occurred (been legisla view, all thing to repation of this
airs and m
t sets out taintenanceome work iciable prop
ent is basedses and the
t begins by ntenance e
ble under thw to determhe capital l
to identify tfied, the stciding whetl or revenu
has resultebstantially ork done toor renewal ending on thpital or reve changes thoes not chacement or re revenue.
or examplein nature osset.
be capital ssuming nore is found owed subje
ent on repaie significanteg, the Chr
ative changhese develoirs and ma updated In
aintenanc
he Commise expenditus done to a
perty. The d on the gee repairs an
establishinexpenditurehe general
mine whetheimitation.
the asset thtatement lother the cose in nature
ed in the re the whole o the asset of the assehe nature oenue in nathe characteange the chrenewal of
e where theor the work
in nature ao other speto be revenect to satisf
irs and mait cases (egristchurch 2es to the deopments waintenance e
nterpretatio
ce expendi
ssioner’s viere. Usuallyan item of tstructure o
eneral provind mainten
ng that firste to be allowpermissioner a deduct
hat is beingoks at the st of the wo.
econstructioof the assefalls short
et, or substaof the workure. Generer of the asharacter of the asset, o
e work form done relate
a deductioncific provisinue in natufying any o
intenance g, Auckland2010 and 2epreciationarrant a reexpendituron Stateme
iture
ews on they this type tangible of the analyisions, the
nance case
t, for a wed, the
n. The tion will be
g worked on principles ork done to
on, replaceet, it will beof being a antially the
k done the rally, work sset will be the asset (or substant
ms part of oes to the p
n for that ions allow f
ure, a deducother legisla
d 2011 n view e in
ent.
of
ysis
law.
n.
o
ment e
e
done (and tially
one re-
for a ction ative
Flow
35.
36.
37.
38.
wchart - ap
The folloInterpre
As noteddeductiolimitatioconcerneon repai
Capital edeprecialoss will and any availabilInterpre
It is alsodistinctioAustraliain applyi
pproach to
owing flowcetation Stat
d earlier, oton for repain in s DA 2ed only witrs and mai
expenditureation rules i be availab improvemity or other
etation Stat
o importanton that thea). Care ming case au
o analysis
chart showsement take
ther limitatrs and mai
2(2)). Howh the applintenance.
e is not dedin subpart le. Since tents to thorwise of a dement.
t to remem answer wi
must be useuthorities to
7
s the approes:
tions to thentenance e
wever, this Ication of th
ductible butEE. If thoshe 2011-20
ose buildingdepreciatio
ber when cill always bd in applyino different c
oach the an
general peexpenditureInterpretatihe capital li
t will be suse rules are012 incomegs have a 0n loss is ou
consideringe a matter ng the capicircumstan
alysis in th
ermission me (eg, the pion Statemmitation to
bject to thee satisfied, e year, cert% deprecia
utside the s
the capita of fact andtal/revenueces (Auckla
his
might deny private ent is
o expenditu
e normal a depreciattain buildination rate. scope of thi
l/revenue d degree (Be tests andand Gas (P
a
ure
tion gs The s
BP also C)).
Rele
39.
40.
41.
42.
43.
Ana
Is th
44.
45.
evance of c
Until thethe deduspecificaalteratiootherwis
Since thexpenditdeductiblimitatiostatemethe repe
In the Cs 108 an2007 is s 108 exincreases 108). done to expenditcontinuethe partcontinuerepairs a
In additithe genethe Comyears reparticulabetweencircumst
Thereforcapital/rthe caseeven if dwhetherby the c
alysis
he expend
The firstincurredthe expe
Under thexpenditby the ta
in com
case law d
e 1993/94 iuctibility of ally provideons. An extse) of repai
e repeal ofture on repbility provisns in s DA nt, the bod
eal of s 108
ommissionnd what wilessentially xpenditure e the value Whereas nrepair or ature is not e to be releicular assetes to be theand mainte
ion, many oeral capital/
mmissioner’smain usefu
arly for the n capital antances.
re, in summrevenue cases that specdecided undr a deductioapital limita
diture dedu
t issue to b on repairsenditure sa
he general ture or lossaxpayer:
deriving thmbination o
decided un
ncome yea repairs andd for the dtensive bodrs and mai
f s 108 of thpairs and mions. The 2 apply. H
dy of repair8 is still rele
er’s view, il be deduct the same. on work doof that ass
now under tlter an assecapital in nvant to thet being wore starting pnance expe
of the well-/revenue tes view, the ul in establi analogies td revenue
mary, the Cses (ie, thecifically addder repealeon for repaiation in s D
uctible un
e consideres and mainttisfies the g
permissions to the ext
eir assessaof both (s D
8
nder previ
ar, s 108 ofd maintenaeduction of
dy of case lntenance e
he Income maintenance
general peHowever, asrs and mainevant.
in practice tible under (The mosone to repaset was dedthe generaet will be d
nature.) Ine extent therked on. Tpoint when enditure.
-known repests in one principles shing the dthey offer aexpenditur
Commissione cases not dress repaired legislatioirs and maiDA 2(1).
der the ge
ed when detenance is ageneral per
, a deductitent to whic
able incomeDA 1(1)(a))
ious legisl
f the Incomance expenf amounts saw addressexpenditure
Tax Act 19e has been rmission ins said in thentenance ca
what was d the generat importantir or alter a
ductible (sel provisionseductible o the Commey provide his is becauapproachin
pairs and m form or an establisheddeductibilityand for there in repairs
ner consider about repars and mainon, are relentenance e
eneral per
etermining an allowablrmission fo
on is allowch the expe
e or exclude); or
ation
me Tax Act 1diture. Secspent on reses the dede under this
976, the dedtested und s DA 1 ande Commissase law tha
deductible ual provisiont differencean asset the the secons expendituonly to the emissioner’s v
guidance ouse identifyng the dedu
aintenancenother. Ford in these cy of such ex distinctions and main
rs that bothairs and mantenance exvant when expenditure
rmission?
whether exle deductior deduction
ed for an aenditure or
ed income
1976 goverction 108 epairs and ductibility (os legislation
ductibility oder the gened the gene
sioner’s 199t existed b
under the ons of the ITe is that unat did not nd proviso ure on workextent thatview, the c
on identifyinying the assuctibility of
e cases appr this reasocases over xpenditure
ns they maktenance
h the generaintenance)xpenditure determinine is prohibit
xpenditure n is whethens in s DA 1
amount of loss is incu
or a
rned
or n.
of eral ral 94 efore
old A der
in k t the ases ng set any
ply on, in the , ke
ral ) and ,
ng ted
er 1(1).
urred
Nexu
46.
47.
48.
49.
Exam
in ass(s
us with in
The esseexpenditbusinessThis is re
The leadCIR v Ba(1978) 3the requincurredtaxpayeconsiderEarlier s“expendpreserve“necessaword “nesufficien
To deterexpenditmust bethe expecontinuoprocess longer ait is to dthat assLtd v FaX26).
Paragrapon a busrequiremdeductibderivatiokeep theNZTC 9,expenditexpenditconsider(HC)).
mples – ne
Exampleestablish
Jack ownadvertiseconcludesdown. Jatenants. have the
the course sessable inDA 1(1)(b)
ncome
ential featuture and ths by the taxeferred to a
ding cases oanks (19783 NZTC 61,uirement fo and the asr in order frs these dectatutory priture neceses that requarily” is no ecessarily” t degree of
rmine whetture and its consideredenditure is ous incomewill alwaysn asset is nemonstrateet and incormer (Surv
ph (b) of s siness, permment under ble even whon of assese enterprise164 (HC) ature incurreture. Paragred (see als
exus with
e 1 – tempohed)
s a rental pred the propes that the reack decides t The propert property rep
of carryingcome or ex)).
re of s DA he deriving xpayer for tas the statu
on deductib) 3 NZTC 6271 (CA). r a statutorssessable inor the expecisions remrovisions thssarily incuuirement folonger incl did no morf connectio
her the reqs relevanced. The factincurred. T-earning pr
s be a mattnot used ine that thereome from thveyor of Tax
DA 1, whicmits a wide para (a), ehere that exsable income on foot orat 9,168). Ted to protegraph (b) aso Thornton
income
orary break
roperty. Jacrty he is exp
eason he canto tidy up thty is temporapaired, clean
9
g on a businxcluded inc
1(1) is the of assessathe purposutory nexus
bility under61,236 (CA In both cary nexus toncome or cenditure to
main relevanhat corresporred in carror nexus, nuded. It isre than indn between
quired nexue to the taxtual situatioThe expendrocess. Ther of fact a an incomee is a suffiche activity xes) (1910
ch applies oer approachexpenditurexpenditure me in somer reduce exThat is, pact or advan
also permitsn Estates Li
k in rental a
ck’s tenant hperiencing dinnot find a nhe property tarily unavailned, and pai
ness for theome or a c
requiremeble income e of derivins.
r earlier inc) and Buck
ases, the Coo exist betwcarrying on be deductint to the inond to s DArying on a botwithstand
s the Commicate a req the expend
us exists, thpayer’s incon must bediture muste continuan
and degree.e-producingcient nexusor business) 5 TC 529
only to taxph than parae under par “… cannote positive wxpenditure”ra (b) permnce a busins longer-teimited v CI
activity (su
has just movifficulty findiew tenant isto make it mlable for rentnted. Once
e purpose oombination
ent of a nex or the carr
ng assessab
ome tax legley & Youngourt of Appween the ex of a busineible. The Cterpretatio
A 1(1)(b) rebusiness”. ding that th
missioner’s vuirement thditure and t
he true chaome-earnin consideredt be connecnce of an in. This meag activity th between es (Vallambr, Rhodesia
payers who (a). In cora (b) may t be directly
way, but [is]” (Cox v CIRmits a deduess or to avrm objectivIR (1995) 1
fficient nex
ed out. Althng a new tes that the pro
more attractivtal while Jac this work ha
of deriving n of both
xus betweerying on of ble income.
gislation arg Ltd v CIReal highlighxpenditure ess of the Commissionn of s DA 1eferred to Section DAhe word view that that there bthe busines
aracter of thng process d at the timcted to a ncome-earnans that thehe more difexpenditurerosa Rubbe Railways,
are carryinontrast to th still be y linked to ] … made tR (1992) 14
uction for void or redves to be 17 NZTC 12
xus
hough Jack nant. He
roperty is toove to potentck arranges tas been don
their
n the a .
re R hted
ner 1(1).
A 1
he be a ss.
he
me
ning e fficult e on er Co Case
ng he
the to … 4
duce
2,230
o run ial to e
Does
50.
51.
52.
53.
54.
Wha
55.
56.
Jack will sufficient
Exampleestablish
Tina owndecided tundertakedeductiondamage sdeductiblused to dnot have
s the capi
Having cexpenditwhetherthe expeIf an amdeductib
The courexpendittests, it those caexpendit
The courrepairs a
Th
Thto
If the wonature, texpendit
This Inte
at is the as
To estabcapital oGas (PCreplacemassessmor reven
FrequenexerciseColonial work wastrengthwas the repair wSimilarlyheritage
look for a ne nexus to Ja
e 2 – repairhed)
ed a residento move intoen repairs on for the cossustained whe because th
derive assess the necessa
tal limitat
concluded ature under r the capitaenditure to
mount of exble.
rts have foture is capiis importan
apital/reventure.
rts have usand mainte
e first stag
e second st that asset.
ork done tothe capital ture.
erpretation
sset being
blish whethor revenue ) at 15,706
ment is beinment can benue nature
tly, as Lorde and the an Motor, She
as carried ohening and warehouse
work on a boy in Case Xe building, t
ew tenant. Tck deriving
rs made aft
ntial rental p the house an the proper
st of the repahen the houshe rental actsable incomeary nexus to
tion deny a
a deduction the general limitation the extentpenditure i
rmulated vtal or revennt to considnue tests in
sed a two-snance expe
e is to iden
tage is to c
o the asset limitation i
Statement
g worked o
er expenditnature the
6, “is to ideng applied”e made as tin the cont
d Nicholls enswer is oberlaw and Cut to an eigthe additio
e. In Sherlaoat-shed. T
X26, where the relevan
10
The expendiassessable i
ter rental ac
roperty for sand use it asrty and had airs to her hse was tenativity has cee. At the tim Tina’s asses
a deductio
n is availabal permissio in s DA 2(t to which ts found to
various testnue in natuder the appn the contex
stage approenditure is
ntify the ass
consider the
indicates tin s DA 2(1
t now looks
on?
ture on rep first step,
entify the ob”. This is imto whether text of the a
explains at bvious”. ThCase X26. ght-storey
on of a storelaw the taxThe relevanthe taxpayt asset was
ture that Jacncome from
ctivity ceas
several years her home. it fully repaiouse on the nted. Howeased and the
me the expenssable incom
on for the
le for repaion, the nex1) applies the expendibe capital i
s for determure. Howevproach to bext of repair
oach when d capital or r
set that ha
e nature an
hat the exp1) will deny
s in more d
pairs or maas Lord Nicbject to whmportant be the work uasset ident
15,706, “thhis is demon In Colonialwarehouseey. The repayers re-pnt asset waers earthqus the buildi
ck incurs wil his rental a
sed (sufficie
s. Two year This year snted. Tina s basis they rver, the repae house is nnditure was
me.
expenditu
rs and mait step is toto deny a dture is of ain nature, i
mining whever, before e taken whrs and main
determiningrevenue in
s been wor
nd extent o
penditure is a deductio
etail at the
intenance wcholls stateich the testecause thenundertaken ified.
his is a stranstrated in l Motor signe, including levant assepiled and caas the boat-uake-strengng. Howev
ll have a activity.
ient nexus n
rs ago she he has seeks to clairelated to air costs areo longer bei incurred it d
ure?
ntenance o determinededuction foa capital nat will not b
ether applying then applying
ntenance
g whether nature:
rked on.
of the work
s capital in on for that
ese two stag
work is of aed in Aucklat of repair n an is of a cap
aightforward cases suchnificant rep earthquaket in that caarried out o-shed. gthened a ver, there w
not
im a
e not ng did
e or ture. e
hose g
done
ges.
a and or
ital
d h as air
ke-ase other
will
57.
58.
59.
The
60.
61.
be situatseveral cwhat thecontext.
In Aucklgas-distcorrosioentry. Bunreliabas each introduccast irontransmitremaininsupport
The issuthe polyidentifyiapplied, whose fuAucklandof the gaphysical new pipepipes nosignificaidentifiedsubstant
The Privthat havrelevantwhat thecarry ou
“entirety
In the Cupheld),the asseGas Comthis testincome eInstead,in the Aulooking fadoptingcase (whway to identirety result fro
In Lindsaentirety being a thing tha
tions wherecases where asset is th
land Gas (Pribution sysn and fractBy the 1980le and expe problem wced a progran and steel tted at a higng function conduit for
e before thethylene png the obje found the unction wasd’s gas-distas-distribut componenes, the chao longer disnt portion od asset (Autially, it wa
y Council’sving a degret to finding e asset’s fuut that func
test” – “a
ourt of App, Blanchardet being wompany Ltd v which conearning act, the Court ustralian Hfor “a physg the wordshen applyindentify the of the physom misiden
ay, Kitto J by itself anphysical that is used f
e the answere the courthat is being
PC) the taxpstem. The ure issues 0s, the taxpensive to mas identifieamme of in gas pipes. gher pressu of the old r the polyet
he court waipes was deect to whichrelevant ass to carry gtribution sytion systemnts. The Prracter of th
scharged thof the systeuckland’s gas found to
reference ee of physi a single asnction is antion.
a physical
peal decisio J rejected rked on byv CIR (1997centrated otivity had b of Appeal iigh Court cical thing ws used by thng Kitto J’s asset beinsical asset ntification.
considerednd not a suing that safor landing
11
er is not sots have prog worked o
payer had cast iron acausing sigpayer’s sys
maintain used. To rectnserting po The polyeure and we cast iron athylene pip
as whether eductible ash the test osset to be tgas from onystem. Them as a functrivy Councilhe existing heir originalem was upas-distribut be capital e
to “an assecal connect
sset. Consind what ite
thing whi
on in Auckla the “profit
y Williams J7) 18 NZTCon the relatbeen rejectein Aucklandcase Lindsawhich satisfhe Court of approach ig worked o in question
that a slipbsidiary patisfies a “p (and subse
o obvious. ovided guidn in a repa
major proband steel pignificant gastem was ining a “find ify these islyethylene
ethylene pipere less likend steel pipes.
the expends repairs. Tof repair or the “assemne place to e asset wastional entity went on to system wa function ograded. Astion systemexpenditure
emblage of tion betweederation al
ems or com
ich satisfie
and Gas (wt-earning en in the High
C 13,408). tionship of ed in Aucklad Trotting fay v FCT (19fies a particf Appeal in n Lindsay),
on was by in, pointing
way ought art of anytharticular noequent laun
In this regaance on hoirs and ma
lems with ipes had lea
as leakage an a poor staand fix” sysues the tapiping into
pes allowedely to leak. pes was to
diture on thThe Privy C replacemeblage of lin another” ts not an absy separate o hold that,as changed f carrying gs the chara
m) had chane.
linked pipeen componeso needs toponents ar
es a partic
hich the Prntity test” uh Court dec Blanchard the work toand Trottinavoured Kit961) 106 Ccular notion the Poverty, stated thanquiry intoout the dis
to be conshing else – totion” – namnching) of b
ard there aow to identiintenance
its low-presaking jointsand water ate of repaiystem of repaxpayer its existing
d the gas to The only act as a
he insertionCouncil, in ent was beinked pipes hat made ustract conc from its , by inserti as the old gas, and a
acter of the nged
es” suggestent parts iso be given re necessar
cular notio
rivy Counciused to idecision (Auck J noted tho the taxpa
ng (CA). tto J’s appr
CLR 377 of n”. Blanchaty Bay Electat the correo the totalitstortion tha
sidered an the slipwaymely a phyboats and s
are ify
ssure s,
r, pairs
g o be
n of
ng
up cept
ng
ts s to
ry to
on”
l entify kland at
ayer’s
roach
ard J, tric ect y or t can
y ysical ships
62.
63.
64.
65.
66.
for the pat 384:
Bprea[E
Kitto J ais an “enand conc
I pnainretoafo
Kitto J cphysical
an
sep
The firstslipway of a larg
The secoidentifiaimportandistinguijudgmenitem of cfundame“principaitem “seseparateAlternatcharactehaving pbe that acases dis
Lindsay agreed w
Tpslaidthvephaitw
purpose of
ut where the urpose of decelevant to cos such, but foEmphasis add
lso noted itntirety by itcluded at 3 am of opinion
purposes of tot as a subs principal, an
n a discussion enewal in the o which the chny larger thiorm part. [Em
onsidered i thing whic
“entirety b
parately ide
t factor, thawas whole
ger asset or
ond factor ible” as a pnt enough tished in sont what chacapital equental to theal”). Howeeparately idely identifiaively, it coueristics, sucphysical chaall of thesescuss this f
was appeawith the dehe entirety, itremises on wlipway was usnd which togedentified as thhe cradle is messels are ma
problem was ave no doubpproach the pself, a very s
whether the wo
repairing th
question is widing that que
onsider, one or a physicaled]
t was necestself” or wh385: n that the No. he question idiary part ond indeed th as to whethe opposed senshoice of descring or aggremphasis added
it was relevch satisfies
by itself” an
entifiable a
at the slipw or completr aggregatio
is a little lerincipal itemto be consime way froaracteristicsipment is pe taxpayer’sver, severaentifiable”.
able becausuld be sepach as not bearacteristic are relevafactor (or s
led to the Fcision of Kit is said, consihich its businesed or, alternaether were saie slip, the craoved and the
anoeuvred ont rejected by
bt that he waproblem in eithsubstantial eork which was
12
hem. In re
hether expendestion one askis looking notl thing which
ssary to cohether it is
1 slipway oug I have to de
of anything ehe principal, er work done ises abovemeniption is to begation of thid]
vant when c a particula
nd not a “su
s a principa
way was an te in itself ron of thing
ss clear. Tm of capitadered as a
om other ites led the copresumablys business al possible . For examse it is a funarately ideneing physics that diffe
ant aspects similar facto
Full High Coitto J, statinisted, either, ess was conduatively, of a nuid to constitutadle employed dolphins andto the cradle. the learned as right. It wher of the sug
erection and ts done was do
eaching his
diture has beeks what is tht for a profit-eh satisfies a
nsider whea “subsidia
ght to be consecide, as an eelse. It is sep item of capin relation to i
ntioned, the sue made is the ings of which
concluding r notion” th
ubsidiary p
al item of c
“entirety brather thans forming a
The fact thel equipmenn asset in iems. It is ourt to its cy an asset t(that beingcharacteris
mple, an itemnctioning untifiable beccally attacher from thos to be takeors) in mor
ourt ((1961ng at 393: of the whole oucted and in cumber of whate the slipwayd upon it, the warping winc This metho judge of firs
would be artificggested ways the real questone in the exe
conclusion
en for repairs,he entirety wearning structuparticular no
ether the asary part of a
sidered, for thentirety by itparately idental equipment constitutes aubject matter slipway itself, it may be sug
that the slhat the slip
art of some
capital equi
by itself”, su being a co
an asset.
e slipway wnt suggeststs own righnot clear frconclusion. hat is impo
g the ordinatics could mm of equipmnit in its owcause of phed to otherse of other n into accoe detail.
1) 106 CLR
of the partnerconnexion witht were called . These comphauling mach
ches by meand of approacst instance acial in the extfor the slipwation for decisioecution of repa
, Kitto J sta
, and for the which it is ure or entity, otion.
sset or propanything el
he tself, and ntifiable as nt, so that a repair or a
r in relation , and not ggested to
ipway was pway was:
ething else
pment.
uggests theomponent p
was “separas it was ht and coulrom the A principaortant or ary meaninmake such ment couldwn right. hysical r items or items. It m
ount. Later
R 392) who
rship’s h which the components ponents are hine by which s of which
ch to the and we treme to ay was, in on was airs to it. As
ated
perty se”
“a
”;
e part
tely
d be
al
g of an d be
may
67.
Appl
68.
69.
70.
71.
wthpas
The abovby the fa
lying the “
The taxpdemolitiothe sams 113(1)that the whole oftrotting test” frowork wa
It is noterepairs aHoweverwhat theout on thregard, trelevant
The Couincurredexpenditof correcimplicatimaintenhand. Itoo sma
Ifhmresuocosu
The Couasset waPoverty (1998) 1the Highbe vieweline was This strofunction functionsystem” own righ
we see the prhe fact that t
premises or bppurtenancelipway. [Em
ve quotatioact the slip
“entirety t
payer in Auon of a trote site as re) of the Lan “premises”f the club’s track. Them Lindsay,
as to be eva
ed that theand alteratir, in doing e “entirety”hat “entiretthe finding t in a repair
rt of Appea in replacinture on “rectly identifyions of incoance). Then doing so ll a subjectf a subsidiary as been repla
matter of capiteplacement ofubject matter bviously a repomponent andubstituted.
rt of Appeaas the GisbBay reticul
18 NZTC 13h Court’s sued as a sep part of an ongly sugge by itself (i). Similarly
” should be ht.
roblem the athere were oby the fact thes, such as tphasis added]
on suggestsway was a
test”
uckland Trotting track epairs or altnd and Inco” of the clu complex o
e Court of A, found thataluated was
e court in Auions undertso, the cou” was beforty” was rep of the cours and main
al in Povertng overheadpairs or altying the suorrectly idene court thenthe court w
t matter wa part of an assced, there mi
tal. That couldf a car tyre or is correctly spair involving d even if an im
al agreed worne urbanation syste3,779 (HC)uggestion thparate asset integratedests it is ree, it includey, it is relev considered
13
answer to thiother buildinhat, on the phose describ]
s the High C substantia
tting (CA) cand the coterations toome Tax Acb subject t
of buildings Appeal disagt the “prems just the t
uckland Trotaken by thurt still had re it could epair work tort in Aucklantenance co
ty Bay Electd electricityterations”. bject mattentifying then discussedwarned of tas identifiedset is regardeght be a tendd lead to an ar a spark plug een as the wh a replacemenmproved or m
with the Hign reticulatioem) (Povert). Howevehat each set. This was system anlevant to thes all the pvant whethd part of th
is question cngs or erectiopremises, thebed, for use
Court was l structure
claimed exnstruction o the “premct 1954. Thto the repai and improgreed and,
mises” of thrack.
otting (CA)he club app to work ou
evaluate who premises.and Trottingontext unde
tric considey lines with The court er of the exe asset (in d the relevathe danger d, stating ad as the subjeency to classi
absurd result, as a capital imhole of the mont of a mere co
modified versio
h Court’s fon system (ty Bay Elec
er, the Coureparate secs because end incapablhe entirety parts that aher subsidiaat system r
could not be ons on the aere were in connexion
influenced in its own
penditure oof a replace
mises” of thhe taxpayers and altevements an applying the club on w
consideredlied to “preut a means hether the w. Thereforeg (CA) is coer the curre
ered whethe undergroudiscussed t
xpenditure the contextant asset inof distortiot 15,006: ect matter andfy what has o for example, mprovement wotor vehicle, tomponent, evn of that com
inding that (rather thanctric Power rt of Appeaction of the each separae of separa test whethre necessa
ary parts ofrather than
affected by ppellant’s
n with the
in its decisright.
on the ement trace club under contende
erations wand not just he “entiretywhich the re
d how the emises”. of determiwork carriee, in that onsidered sent legislat
er expenditund cables the importaand noted t of repairsn the case aon if too lar d that part
occurred as a treating the when, if the he work is
ven a vital mponent is
t the relevan the wider Board v CIl disagreed line could ate sectionate operatioher an assery for it to f an “integrn assets in t
ion
k on er d s the the y epair
ining ed
still tion.
ture was ance the
s and at ge or
nt r IR d with also of on. t can rated their
72.
73.
74.
75.
76.
77.
78.
Howeverwhere a might berepair onbeing tosubject a subsidhas beenas a matof a merclassified
In conclusystem, clearly dnetworkfrom the
In Hawkincurredexpenditpoint is test” fro
Goddardresidentwas:
a p
an
a s
The “phytransformin a certthing (iethe suppurban rebecauseinstalledwhich thfound todistribut
Goddarddistributdisconnestructurenecessa
Regardinnoted thby custoby the fatype distcustomefactors, separate
r, the Cour “substantie made to anly” (at 15,o broad, thmatter couiary part ofn replaced,tter of capire componed as a repa
uding that the Court distinguisha, in that “[ie rest of the
kes Bay Pow in replacinture on “reidentifying m Lindsay
d J, in applyial distribut
physical thi
entirety by
separately
ysical thingmers and dtain area. Te, the electrply of electresidential d it was “ph
d undergrouhe distributo be an entition system
d J found thtion systemected from e” (at 13,7ry that eve
ng the “sephat the urbaomer type aact most oftinguished ers. It appesuch as loc
ely identifia
t of Appealal capital wappear so r,007). In ohen substanld be seen f an asset i there mightal. That cent, even aair.
the relevanof Appeal c
able in engii]t could bee Poverty B
wer the coung overheadpairs or alt the “nature (at 13,700
ying the antion system
ng that sat
y itself and
identified p
g which satidistributors This suggesricity networicity). Furistribution ysically cap
und withoution system irety by itse
m.
his to be them “could not the nationa01). It is c
erything req
parately idean residentand area anf it was und“urban resears Goddacation, wheable.
14
l also warnework by an relatively mother wordsntial capita as merely is regardedht be a tencould lead t vital comp
nt asset waconsidered neering ter
e switched Bay networ
urt considerd electricityterations”. e of the rel
0–13,701).
alysis fromm constitute
tisfied a pa
not a subs
principal ite
isfies a par that supplsts that theork) that carther, a parsystem) wapable of bet recourse t satisfies” (elf and not
e case event operate aal grid) andclear from tquired to ea
entifiable astial distribund that its sderground. idential” fro
ard J was pen determin
ed against individual e
minor as to s, if the subl work that a repair to
d as the subdency to cl
to an absurponent, ma
as the Gisboit relevant rms from th(or isolatedk” (at 15,0
red the issuy lines with Goddard Jlevant asse
m Lindsay, ded the relev
rticular not
sidiary part
m of capita
rticular notiied electrice inquiry is arries out articular partas found toing separatto or effect(at 13,701) merely a s
n though ths an indeped was “not this that in arn a profit
s a principation systemseparatene In this regom “urban rimarily conning whethe
taking this electricity sbe thought
bject matte forms part the whole.bject mattelassify whard result. Ay still be co
orne urban that the syhe rest of td by electric07).
ue of wheth undergrou, noting tha
et”, applied
determined vant asset
tion,
of anythin
al equipmen
on” was thity to dome focused on particular t of the neto be the reletely and indt upon the o). Consequsubsidiary p
he urban reendent entian entire p defining an from it is i
al item” inqm was sepass was furtgard, custo industrial” ncerned witer two item
inquiry toosupply autht a matter oer is seen at of the tota. Converseer and that t has occur
A replacemeorrectly
reticulatioystem was the Povertycal means)
her expendund cables at the start the “entire
that the uby finding
ng else, and
nt.
e network estic consun a physica function (itwork (the evant assedependentlother areasuently, it wpart of a la
esidential ity” (if
profit-earninn asset, it iincluded.
uiry, Goddarately identher identifomer area a and “rural”th physical
ms were
o far hority of s al ely, if part rred ent
n
Bay
iture was ting ety
rban it
d
of mers l e,
t y s as rger
ng s not
ard J tified ied and ”
79.
80.
81.
82.
83.
84.
85.
With regcapital einvolvedoverhealed “to tcapital e
Goddardduring thdistributwere an transformitems ththis case
In Case the hoteThe lowefloor intoand admas a pizzresident
The taxpdamagedincome fJudge Baexpendit
In reachrelevantThis wastitle andthe buildthat the
Case N8whethera substaconcerneconcretewas the conveyoequipmefacilitiesin relatioof severcontrol aused equCommisthat eachad beethe planamount
Having cthe variowas the expendit
gard to wheequipment id in putting d lines, andhe irrefutab
equipment”
d J also fouhe course otion system integral pamers were at are intege the supply
F67 the taxel’s busineser floor of to two flats.
ministered tza parlour aial flats to
payers carrd the buildfor the portarber disallture.
hing his dect asset raths because t insured an
ding was in building as
8 is an examr an aggregantial manued quite sue “batching batching p
or and a squent and sup) and that on to that wal acres of and supervuipment ansioner arguh individuan a repair, t was a sin that the ex
comprehenous items o relevant asture, noting
ether the “din itself, Go the netwod the extenble conclus (at 13,701
nd that theof the conv
m (the relevart of the d necessary gral to an ay of electric
xpayers cas was a twothe building The build
the propertyand a knickthe respect
ried out signing. The tation of the owed the d
cision, Judger than the
the taxpayend administternally pas a whole w
mple of a siation of thi
ufacturer anbstantial w plant”. Th
plant (whichuare-shapepply; and theach item owhole. (Th land, an ofisor’s office
nd storage yued the plaal element s renewal orgle entity,
xpenditure
sively revieof expenditusset or entig at 3,070:
15
distributionoddard J nork undergro
nt of the sysion” that th1).
e distributioversion to uvant asset iistribution for the netasset’s abilcity) tend t
rried on buo-storeyed g was dividing was ony as one buk-knack shotive shop le
nificant repaxpayers clrepairs thadeduction o
ge Barber ide individualers jointly otered the prtitioned di
was the rele
ituation whings made nd supplier works underhe taxpayerh compriseded tower; thhe dispatchof expendite plant wasffice and ade, yards, a yards, in adnt should nshould be ar replaceme then the wwas of a ca
ewed the naure, Judge ity against
system” woted that thound, the cstem that hhe system w
on transformndergroundn the case)system as twork to retity to fulfil to be a sub
usiness as h rental builed into two
n one title auilding. Thop. The upessees.
pair work afaimed a de
at insuranceon the basis
dentified th shops and
owned the property as id not chanevant asset
ere the couup a single of ready-mrtaken in rer contendedd the grounhe associath office, conture was fos situated odministrativtruck parkiddition to tnot be seenaddressed tent. It was
work was ofapital natur
ature of the Bathgate t which to co
was a princihe sheer scacomparativehad been pwas “a prin
mers that wd lines were). This wasa whole. Tticulate. Thits physicalsidiary part
hotel propriding adjoin
o shops andand the taxpe shops we
pstairs flats
fter a fire eeduction age did not cos that it wa
at the buildd flats withiland and bu one buildinge Judge Bt.
urt had to ce asset. Thmixed concrelation to a d that the wnd storage ed water antrol room ar repairs oron premisesve building,ng and washe batching as one ent
to consider s further cof such an exre.
e taxpayer’turned to coonsider the
pal item ofale of the ce cost with
put undergrncipal item
were replace a part of s because tThe his suggestl function (t of the ass
ietors. Parning the hod the upperpayers insuere leased o were lease
extensively gainst their over. as capital
ding was thn the builduilding on ong. The facBarber’s fin
consider he taxpayerrete. The c ready-mixwhole entitbins; the nd electricaand dispatcr maintenas that cons, a laboratoshing area,g plant.) Ttity, but ra whether th
ontended thxtent, size
’s businessonsider whe nature of
f cost
round of
ced the they
ts in set.
t of tel. r ured out ed as
he ing. one ct ding
r was case xed y
al ch nce
sisted ory, a , and The ther here hat if and
and at the
86.
Over
87.
88.
I wcoecoretrcoaureapgth
I rogthcoths
Judge BaThe firstconveyethe readcontrol rentities were phcontinue
Demafi
rseas auth
The Newwhen idecontext.Margrett
In O'Grawas consmoke apurposeConseqube capita
Aa w…reinisthchthpth
find there wewhich stores, contained in thntity is physoncerned, it ieady mixed coreatment as aomposite whn existing spandertaken in tenewal of the nd impressio
present purpoearbox was rehat would see
consider theoom, which wround bins, elhe ground bionnection behe less tangiupervision fr
athgate idet entity beined, mixed ady-mixed coroom and twere conneysically anded at 3,071Different functintities. The f
manufactured n administratrst entity.
horities
w Zealand centifying th Three cast.
ady the taxstructed to
and fumes fs. Rowlatt
uently, the al. Rowlatt
As regards the replacement.
which you thro… what is theepairing the ron entirety, it iss very largelyhe gases and himney. It wahis: They bu
place; they puhey switched
re two entitieconveys, mixehe final ready sically attachs continuousoncrete. To idn individual ithole. If a moark plug, so fathe course of spark plug ason as to whaoses. The eneplaced, that m more like a
e supervisorwere all houselevators and tins, elevatoretween the tible connectirom one to t
entified twong the thingnd produceoncrete. Thhe dispatchected, Judgd functiona: ions, althoughirst was the einto ready mixive office whic
courts havehe asset beses often re
payer built do the wofrom the fu J found theexpenditurt J (referrin chimney, I th. You repair aow away. The entirety? Toof by puttings having a newy a questionfumes, and soas unsafe andilt a new chiut flues to thd the gases f
16
s involved in es and producemixed concre
hed or joinedsly involved dentify any ontem would be otor car has a ar as the moto repair or mais a capital itemat is includedntity in the examay be a repaa capital item.
r's office, theed in a separattower, to be ars and towertwo were theions of electthe other. [E
o separate egs attacheded the matehe other enh and supege Bathgateally distinct
h associated fntity handlingxed concrete.ch controlled a
e taken guiding workedeferred to a
a replacemrk of the o
urnaces thae chimney re on building to Lurcohink it is reallya roof by puttiere is no doubThe slate is nog in new slatesw one and it i
n of degree. …o on, were ledd would not doimney at a lihat chimney from the old
the work. Thes the materiate as supplied
d, or so far as in the one pne part and sin unrealistic in new spark pluorist is concerntenance of tm. It is a qud or excludedample given isair, but if the .
e dispatch ofte and detacha separate ar plus its cone electrical wtrical controlEmphasis adde
entities as d to each oerials makintity being rvisor’s offie placed im from each
unctions, werg the raw mat The second and supervise
dance fromd on in a reare O’Grady
ment chimnld chimneyt raise stea stack to beng the chimtt) said at y very clear. ing on new slat about that. t the entirety s. What is thes not repairin… This was a fd by flues ando any more. Wttle distance and then, w flues into th
e first and obvals making upd by the objec the materialsrocess of mangle it out for this context. ug installed inned that is wohe motor car,estion of facd in an entitys the motor ca engine were r
ffice and the ed building frnd distinct etents. The o
wiring connes, administred]
being the rther that stng up and the separatces. Even portance o other. Jud
e carried out erials that wewas more in t
ed the function
overseas apair and my, Samuel J
ey stack. T, which waam and powe the relevamney stack 101: Of course eveates instead o But the critica in the roof. Ye entirety? If g an old one. factory chimne then went upWhat they dide away in ano
when it was fihe new flues
vious is that p and ctor. That s are anufacturing r separate It is a n the place of ork , and is not a ct, degree y for ar. If the replaced,
control rom the entity from only ections and ration and
relevant asstored, contained itely housed though the
on the fact tdge Bathga
in the two ere the nature of ns of the
authorities maintenanceJones and
The chimnes to carry awer for collant asset. was found
ery repair is of old ones, cal matter is You are you replace I think it ey to which p the d was simply other
finished, s and so up
sets.
in d e two they te
e
ey away iery
to
89.
90.
91.
92.
threothnnch
Rowlatt part of tdistancephysicaldecision
The latereplacemusing a plant thaof repairerected chimneychimneySession larger enstack wabe applierevenuefact the substitutstated a
…bcowthdnin
It is con“commean item Rather hintendedthe factosuggestiand CA) structuremainten
The deciwhere thof Inlandthe factsPresidenthat “thea questioLordshipdecision as this c
he new chimepairing a sune. And theyhey kept it, beo accounting ew chimney ahimney is the
J found as the colliery.e away at aly separate.
r decision Sment chimnlarge groupat dischargr and was rclose to the
y could takeys were par found the cntity, the faas the releved. The co nature. T expense inte was onlyt 518):
…but so far as eyond a doubommercially
which is the fache words of Roubtless an inone the less a
ndustrial profit
sidered thaercially … in must be anhis Lordshipd to refer toory to be coing this, the and Hawkee test as a ance conte
ision of thehe chimneyd Revenue s in that cant Cooper ree critical mon of degre
p found at 5 of Rowlatt
case is conc
mney. I do noubsidiary par had them boecause they thfor tastes in m
and started to entirety here
a matter o. That Rownother plac
e from the r
Samuel Jonney stack. p of buildinged into a c
replaced bye existing ce over the ort of the strchimney toactory. Thivant asset tourt found the court als
ncurred in ty 2% of the
this case is cot that the chim
y and functioctory. It is quowlatt, J, the ndispensable pa subsidiary pat-earning und
at his Lordsseparable” n entire prop’s referenco what a peonsidered ae New Zeales Bay Pow means of iext.
e court in Say was foundin Samuel se from thoeferred to tatter is ... wee” (see ab518 that “itt J, as applicerned the
17
ot think it is rt of the fact
oth. Perhaps thought it was manufacturing use that one
e and they sim
of fact that wlatt J notedce could surest of the
nes, also coIn this casegs with thehimney. T
y a new chimchimney, wold chimneyructure of to be an inseis meant thto which ththe expendso noted it taking downe value of t
oncerned the mney with wh
onally an inseuite impossibl “entirety” witpart of the facart, and one oertaking. [Em
ship’s refere” does not sofit-makingce to “commerson in buas completeland courts
wer) have cdentifying
amuel Joned to be the Jones arguose in O’Grthe commewhat is the
bove at parat [was not] ed to the ffacts seem
possible to tory. I think they pulled do an artistic thg circles. Any instead of the
mply renewed
the chimned the chimnggest that factory and
oncerned the, the taxpe power beihe chimneymney. The
which was dy’s functionhe main faeparable anhe factory rhe test of reiture on the was influen the old chhe factory.
facts seem tohich we are coeparable pare to describe th which we actory, doubtleof many subsimphasis added
ence to thesuggest hisg structure mercially …siness woue. Even if hs (as seen ilearly rejecthe asset in
es contrasts relevant asued they werady. In coent made bye entirety? agraph [88 part of ouracts in the
m to demons
regard that it is simply ha
own the old oning to look at.how, they sime old one. I tit. [Emphasis
ey was not ney was buthe new ch
d that this i
he building ayer procesng suppliedy was in a de new chimemolished n. Both thectory block
nd necessarrather than epair or repe chimney nced in its himney and Lord Pres
o me to demononcerned is phrt of an “entithis chimney re concerned.ss an integraldiary parts, od]
e chimney b Lordship cto be the re inseparablld regard ahis Lordshipn Aucklandcted a profin a repairs
s with that sset. The Cere unable onsidering ty Rowlatt J... I think it] of this star duty to re O’Grady castrate ... th
as aving a new ne; perhaps . There is
mply built a think the s added]
a subsidiaruilt a little himney wasinfluenced
of a ssed paperd by a steadangerous ney was once the ne old and nk. The Coury part of a the chimn
placement c to be of a decision byd building tsident Coop
nstrate hysically, irety”, as being in . It is l part; but of a single
being considered elevant assle” was as necessarp was
d Trotting (Sit-earning and
in O’GradyCommissionto distingu
this point, L in O’Gradyt is very laratement). eview the ase, but so he chimney
ry
s his
r m state
new ew rt of
a ey could
y the he
per
that set.
ry for
SC
y ners ish Lord y rgely His
far ... is
93.
94.
95.
96.
Key
97.
... part oidentifyiconsiderstated bbe that ifactory blittle distany othe
WhethercharacteMargrett1856 anA new reimprovefrom the
The courreservoipremisesdistinctivpart of a
Finlay J NarepwdBseC
Thereforpractical
points on
The Comidentifyi
Threpis
Idestrsatreathisep(CA
A sdaidethetensu
of an entireng the releration of thy his Lordsin Samuel Jbuilding, whtance awayer structure
r assets weeristics alsot, the taxpad had deteeservoir (wment on the old reserv
rt had to der was capits occupied”veness of ta larger ass
stated at 4ow here the snd I cannot theservoir is par
part perfectlywe are dealing ecision of Mr. ullcroft Main Ceparate and d
Collieries, Ltd.
re, when del and visua
identifyin
mmissioner ng the asse
e “first stepplacement relevant to
entifying thructure or etisfies a paalises its ecngs or busparate asseA))
single assetnger of disentified. Foe subject mndency to cbject matte
ety”. In thivant asset e specific fa
ship, the disJones the chile in O’Gry at anothee.
ere separateo appears toayer compaeriorated to which was twhe old reservoir.
ecide whethtal expendit”. The couhe reservoset (the wat
488: subject mattehink that it is rt only of the y clearly divi here. If auth Justice RowlaCollieries, Ltd,distinct thing t [Emphasis a
etermining l inquiry ca
ng the ass
takes the fet being wo
p is to idenis being ap consider?
he asset is nentity; rathrticular notconomic vainess systeet. (Lindsa
t may be mtortion if toor example,matter and tclassify whaer is too bro
18
s regard, h in any giveacts of thatstinguishingchimney warady the cher place and
ely identifiao have beeany owned such an exwice the carvoir) was c
her the expture or monrt examineir to decideter tower).
r under discusmaterial, thouRespondents’sible from thhority were neatt, to which I, because thethan was the cdded]
whether asan be an ap
set being w
following keorked on:
ntify the objpplied”. In (Auckland
not about ier it is abotion”. The lue only wh
ems does nay (HCA), H
made up of oo large or , if a subsidthat part hat has occuoad then ev
his Lordshipen case wilt case at hag fact betwas physicallhimney builtd was not p
able becausn a decidin an old resextent that iapacity of aconstructed
penditure oney “expend the phys
e whether it
ssion seems tugh it is undo’ whole physiche rest, and ieeded for thatI referred a m reservoir herchimney in O’
ssets are pppropriate c
worked on
ey points fr
ject to whicother word
d Gas (PC))
dentifying tut identifyifact a partihen used inot mean it
Hawkes Bay
interdepentoo small adiary part oas been rep
urred as a mvery replac
p demonstral always invand. Althou
ween the cay connectet was large
physically co
se of physicg factor in
ervoir that wt was not wnd a signifid in 1931 o
n building tnded for repical nature t was a sep
o me to be thubtedly the faal undertakingit is the part wt I should find oment ago, o
re is more clea’Grady v. Bullc
hysically diconsideratio
n
rom the cas
ch the test s, what is t
the profit-eng a “physcular physi
n conjunctiois not to be
y Power, Au
dent parts.a subject mof an asset placed, thematter of cacement of a
rates that volve ugh not cleses seems
ed to the mer, situated onnected to
cal Margrett. was built inworth repaiicant
on a site aw
the new pairs of and physicparate asse
he reservoir, act, that the g. It is a with which it in the
of O’Grady v. arly a croft Main
istinct, a on.
ses on
of repair othe asset t
earning sical thing wical thing on with othe regarded uckland Gas
. There is matter is is regardedere might bapital. If tha single uni
early to ain a o
In n ring.
way
cal et or
r hat it
which
er as a s
a
d as e a he t
Exam
tharep
It inconnoCawhthe
-
-
Idethiwhmaby HCSomaJonoftSuof Ele
Loocombe Pointbe thato Ba
mples – id
Example
Frank is a5 years. Frank hasengine is replaced is a subsilarger ass
Example
Hedgy Lause. Somof one traentirety aparts to f
at forms papair to the
is always acluded or ex the “entiretion” (Linds
ase N8). Which satisfiee thing wou
an entirthings f
separat
entifying wng or simp
hether the iay be helpf physical fa
CA), Hawkeomething thay suggest nes, Margreten be relevbsidiary pathat system
ectric, Hawk
oking to semponents a helpful whverty Bay Etegral to a l the relevaat is physic be the reley Electric,
dentifying
e 3 – recond
an owner-op Until recents had his tax now seriouswith a reconidiary part oset. The eng
e 4 – loan tr
andscape Sumetimes the ailer needs rand not a sufunction and
art of the towhole. (Po
question oxcluded in ety test” – “say (HCA), hen consid
es a particuuld be:
rety by itseforming an
ely identifia
hether a paly a compotem is phyul to see wactors, for es Bay Powe
hat is physic that it is a ett). A phyvant to findarts of an inm rather thkes Bay Po
ee what theare necessahen identifyElectric, Halarger assent asset (H
cally capablevant asset Hawkes Ba
the asset
ditioned ca
perator taxi dtly the taxi hxi serviced resly worn. Thnditioned engf that asset,gine is integ
railer (asse
pplies owns company alrepairing. Thbsidiary part is a compos
19
otal subjectoverty Bay
of fact, degan entity o“a physical Auckland Tering whetlar notion”
elf and not a asset;
able as a p
art of a widonent of a wysically and whether somexample itser, O’Gradycally divisib single asseysical conneding a singlntegrated shan assets iower).
e asset’s funary for the ying the releawkes Bay Pt’s ability t
Hawkes Baye of separa
t in a repairay Power).
being wo
ar engine (s
driver. He hhas been reliegularly but he mechanicgine. The a, and is physral to the ta
et as entire
trailers thatso uses the he trailer is trt of somethisite whole.
t matter co Electric)
ree and imor asset. Ho thing whicTrotting (CAther someth the courts
a part of an
rincipal item
der asset is wider asset functionall
mething cans location oy, Samuel Jble and distet (Case F6ection betwe asset (Au
system shouin their own
nction is an asset to caevant assetPower, Caso physically
y Power). Aate operatiors and main
rked on
subsidiary p
has driven thable and ove his mechan
c recommendsset in this csically and fuxi.
ety)
t it makes av trailers for mthe asset beng else. Th
uld be seen
pression asowever, thech satisfies A), Hawkeshing is “a p are guided
n asset or a
m of capita
itself a sep includes coy distinct (
n be separaor size (LindJones, Margtinct from o67, O’Gradyween compouckland Gasuld be consn right (Pov
nd what pararry out that (Aucklande N8). Somy function iAlternativelon by itself ntenance co
part of a lar
he same taxierall is in goic has adviseds that the wcase is the taunctionally c
vailable for itmaking deliveing repairede trailer has
n as merely
s to what ise focus rem a particulas Bay Powephysical thind by wheth
aggregation
al equipmen
parate physonsidering (Case N8). ately identifdsay (Full Cgrett). other thingy, Samuel onent partss (CA)). sidered as pverty Bay
rts or at function d Gas (CA),mething this not likelyly somethinf is more likontext (Pov
rger asset)
i for the pastood conditioned him that worn engine axi. The eng
connected to
ts customersveries. The dd. It is the s all the nece
y a
s mains ar er, ng er
n of
nt.
sical It fied Ct
s
s will
part
may , at is
y to ng kely verty
)
t n. the be gine that
s to deck
essary
Rela
98.
99.
100.
101.
Wha
102.
103.
ationship w
The prinfor repawhen ideThis beinrelating repairs a
In 2010 “Residenpropertyresidentpart of tIS 10/01rental pridentifyi
IS 10/01from themay be building,on the sstatemestep testof depreCommisstep testapplyingpropertyin IS 10/when co
As was nbeing wodeprecia10/01 was separthemselv“commecommercases bepurposethat in tdepreciamaintenretrospe
at is the na
Once thestage in deductibparticulaindicatess DA 2(1
The genmainten
with depre
nciples that irs and maientifying anng the case to an item and mainte
the Commntial rental y”. IS 10/0ial rental p
the resident1 on how toroperty conng the rele
1 concludede building aseparately , it cannot ame repairnt. IS 10/0t on how to
eciable propsioner const in IS 10/0
g this Interpy identified /01 will be
onsidering t
noted in IS orked on ination rules fwas releasedrate items oves (see th
ercial fit-outrcial fit-out e different fs. It is antihe context
ation purpoance purpo
ectively from
ature and
e relevant a the enquirble is to conar asset. Ifs the expen1) will deny
eral capitalance cases
eciation ru
the courts intenance pn item of tae, when it c of tangiblenance purp
issioner puproperties
01 sets out roperty is atial buildingo identify antext is convant asset
d that if an and it meets depreciatebe separaters and main01 also proo determineperty or is psiders that 01 will be cpretation S for depreci accepted bthe deducti
10/01, simn a commerfor commerd) with the of depreciahe definitiont” in s YA 1 the asset ufrom the ascipated tha of commerses will be oses. It is am the 2011
extent of
asset beingry as to whensider the nf the naturenditure is cay a deductio
l/revenue cs provide gu
20
ules
have devepurposes arangible procomes to ree property tposes will b
ublished an – Deprecia how to deta separate g. In the Cn item of d
nsistent wit being work
item in a rs the defin
ed. If an iteely deprecintenance caovides spece whether apart of the any outcom
consistent wtatement. iation purpby the Combility of rep
milar principrcial properrcial buildin intention tble propertns of “build1). This meused for desset identifat a legislatrcial fit-out similarly tranticipated
1-12 income
the work
g worked onether repainature and e and extenapital in naon for that
cases and tuidance in t
eloped to idre the sameperty for deepairs and mthat is deprbe generally
Interpretaation of itemtermine whitem of dep
Commissiondepreciable h the analyked on or r
residential ition of “deem is foundated. In itases as thoific guidanca particularresidential
mes reachewith the out Any asset oses by apmissioner a
pairs and m
ples apply wrty context.ngs were amthat commety, distinct ing”, “com
eans that inpreciation ied for repation changet the relevareated as th that this ce year.
done to t
n has beenrs and mai extent of tnt of the woature the ca expenditur
he more spthis second
entify the re principlesepreciationmaintenancreciable, thy the same
tion Statemms of depreether an itepreciable pner’s view, t property inysis in this sepaired.
rental proppreciable p
d to be parts analysis, se relied once in the for thing is a rental propd by applytcomes reain a resideplying the tas the relev
maintenance
when ident. However,mended in ercial fit-oufrom the bmercial bui
n the contexpurposes mairs and mae will be mant asset thhe asset fochange will
he asset?
identified, ntenance ethe work doork done toapital limitare.
pecific repad stage of t
relevant ass that applyn purposes.ce expendit
he asset for item.
ment IS 10/eciable em in a roperty or the analysin a residenstatement
perty is distproperty”, itt of the IS 10/01 rn by this
orm of a thr separate itperty. Theing the thre
ached by ntial rentalthree-step vant asset e expenditu
ifying the a, the 2010 (afteuts be treatbuildings ilding” and xt of
may in somaintenance ade to ensuhat is used fr repairs an apply
the secondexpenditureone to the o the asset ation in
irs and the enquiry
sset y ture r
/01
is s in tial on
tinct t
relied
ree-tem ee-
l test
ure.
asset
r IS ted
e ure for nd
d e is
.
Gene
104.
105.
106.
107.
eral capita
The acceor revenapproacthe lead5,233 (Cmaintencourts tarevenue
In McKeInfaoth
A(appwowp
The CouAustraliaLtd [197Press CoBP Austr
From theassist inThe courothers. As Lord the testsguide to
al/revenu
epted appronue nature h was confing decisio
CA). While ance expenake into acc in nature.
nzies the Cn deciding whavoured by thbservations ohe Commonwe
“The sodescriptcircumsother. Oand vagappreciaanswer.distinct boundarand conturns on
‘pce
per Dixo(1946) felicitouside andthey of which mconside
Amongst the faa) the need orayments wereayments were
which were an rdinary princi
were expendedart of the pro
rt of Appeaa had been 72] NZLR 2o Ltd v CIR ralia, which
ese leading determininrts have co In additionNicholls of s need to b a reasoned
ue cases
oach for deis outlined irmed as ben of CIR v M not addresnditure, Mccount when
Court of Appether expendie courts in recf Lord Pearce ealth of Austra
lution to the ption. It has totances some oOne consideraguer indicationation of all the Although the and easily ascry, the line of
nflicting considn questions of
depends on wpractical and aclassification oexhausted in t
on J in Hallstro72 CLR 634, 6s phrases fromd the other; bunlimited app
may incline therations has be
actors weighedr occasion whe made from fe of a once an enduring benples of commed on the busincess by which
al in McKen recognised09 (CA) an (1993) 15 h Richardso
g New Zealang whetheronsidered son, the tests Birkenhead
be applied sd conclusio
21
etermining in BP Austreing the prMcKenzies ssing the decKenzies pron deciding w
peal said atiture is capitacent years is in BP Australiralia [1966] AC
problem is noto be derived fof which may ation may poins in the contre guiding feate categories ocertainable in
f distinction is derations mayf emphasis an
what the expena business poof the legal rigthe process.’
roms Pty Ltd v648. As each m earlier judg
but those phraplication. Thee scale in a paeen taken.”
d by the judicich called for fixed or circuland for all natunefit; (d) how ercial account
ness structureh income was
nzies noted d in New Zend in Buckle NZTC 10,2
on J summa
and cases sr expendituome of the may pointd in Aucklaso as to enaon to be ide
whether anralia Ltd v Freferred app New Zealaeductibilityovides guidwhether ex
t 5,236: l or income thexemplified inia Ltd v CommC 244 at pp 2
t to be found rom many asp point in one dnt so clearly trary directionures which mof capital and obvious case often hard toy produce a sitd degree. Th
nditure is calcint of view ratghts, if any, se
v Federal Com new case comgments are usases are not thy merely crysarticular case
cial committeethe expendituating capital; re producing a the payment ting; and (e) w of the taxpayearned.
the Privy Cealand in Cey & Young206 (HC) adarised in Mc
seven testsre is capitase tests to in differennd Gas (PCable the doentified. Th
ny outgoingFCT. The Bproach in Nnd Ltd (198 of repairs
dance on thxpenditure i
he approach gn the followingmissioner of Ta64-265:
by any rigid tepects of the wdirection, somhat it domina. It is a commust provide thincome expen
es that lie far f draw in bordtuation whereat answer:
culated to effether than upoecured employ
mmissioner of Tmes to be argsed in argumehe deciding fatallise particuafter a balanc
e in BP Austraure; (b) wheth (c) whether tassets or adva would be treawhether the pyer or whethe
Council decCIR v LD Na. Gallen J dopted the cKenzies.
s have beenal or revenu be more ret directions
C) commentminant fea
he tests are
g is of a capBP AustraliaNew Zealan88) 10 NZT and he factors tis capital o
generally g
Taxation of
test or whole set of me in the ates other monsense he ultimate nditure are from the
derline cases; e the answer
ect from a n the juristic yed or
Taxation ued
ent by one actor, nor are ular factors ce of all the
alia were: her the the antages ated on payments r they were
ision in BP athan and Cin Christch principles
n identified ue in natureelevant thas when appts at 15,70
atures whiche:
pital a d in
TC
he r
Co urch from
to e. n
plied. 07, h
22
The need or occasion that calls for the expenditure: This test focuses on the principal reason or need for incurring the expenditure. In the context of this test the object of the expenditure is determined by looking not at the actual thing achieved, but at the reason or need for making the expenditure. Clear and accurate application of this test is important because it will often form the basis for applying the other capital/revenue tests. The Commissioner considers this test to be important in the context of repairs and maintenance expenditure; the focus is on why this work was done in this way at this time.
Whether the expenditure is recurrent in nature: This test involves a consideration of whether the expenditure is recurrent or a once and for all payment. If the expenditure is recurrent and made to meet a continuous demand, this suggests the payment is part of the cost of ordinary business operations and will be a revenue outlay; capital expenditure is more likely to be spent once and for all. To some extent this test holds true for repairs and maintenance purposes. However, the Commissioner considers the usefulness of the once and for all test is limited as a capital indicator in some repair circumstances. This is because frequently repair work, by its nature, might be unplanned or the result of unexpected damage. Repairs and maintenance work that is undertaken regularly on a recurring basis is likely to be revenue expenditure.
Whether the source of the payment is from fixed or circulating capital: This test focuses on whether the source of the payment is from fixed or circulating capital, rather than whether the payment affects the fixed or circulating capital of the business in question. This test is not as useful as other tests in determining whether expenditure is capital or revenue in nature because of the ease with which a taxpayer can choose between financing an asset from circulating capital or financing it from fixed capital, irrespective of the nature of the asset financed. This test has been questioned judicially (Milburn NZ Ltd v CIR (2001) 20 NZTC 17,017 (HC), CIR v Fullers Bay of Islands Ltd (2004) 21 NZTC 18,834 (HC)). In the context of repairs and maintenance expenditure, the test has less relevance because how work is funded is not a reliable indicator of its nature.
Whether the expenditure creates an identifiable asset: This test indicates that expenditure will be on capital account where an asset of a capital nature has been acquired by the expenditure, or where money is spent on improving an asset or making it more advantageous. Work done to an asset will sometimes result in a new identifiable asset, for example where the work done results in the reconstruction, replacement or renewal of the asset or substantially the whole of the asset. Similarly, where the work done involves the alteration or extension of an asset the identifiable asset test may be satisfied.
Whether the expenditure is a once and for all payment producing assets or advantages that are of an enduring benefit: Under this test, expenditure will be regarded as capital where it brings into existence an asset or advantage for the enduring benefit of the business. This test is one of the more relevant and persuasive tests for deciding whether expenditure is on capital or revenue account. However, in the context of repairs and maintenance expenditure, it is often a difficult test to apply, as nearly every repair done to an asset will result in some form of enduring benefit. The Commissioner considers that the more relevant enquiry is the one developed in the
108.
109.
Repa
110.
represa calsTh
Whprtheonretrelis oextheCoindassor
WhprprisomremtrethicomtheThaccexthaaccof
Thereforthese geothers. earthquaidentifiatest to dJudge Ba
I toidin
Case X2Taxationthe dedulegislativlevel of japplicati
airs and m
While thquestion
pairs and msulted in a change of cso result in is “change
hether the ocess: Thie business the procesturns by meevant and on capital openditure ce asset beinommissionedicator of caset being w enhancem
hat the treainciples ofinciples of cme assistanmembered eatment fors test is oftme to, it is e issue of we Commisscounting trpenditure cat same excounting trrepairs and
re, in the coeneral capit For exampake-strengtble asset te
decide whetarber state agree … that o bring into exdentifiable assncome earning
6, which wn Review Auuctibility of ve changesjurisdictionion of the c
maintenan
e deductibn of whethe
maintenancechange in t
character ha an advanta of characte
expenditurs test focusstructure sss by whicheans of regpersuasiveor revenue context, theng worked r’s view theapital expe
worked on ient of that
atment of tf commerccommerciance, is not that tax anr one may dten used to not a suffi
whether thesioner ackneatment recan be quitependiture. eatment asd maintena
ontext of retal/revenueple, when cothen a buildest, the endther the cosd: the disputant
xistence advaset, ie the prog structure (as
as decided uthority, is repairs and in 1994. A, the Comm
capital/reve
ce cases
ility of repaer the costs
23
e line of cathe charactas occurredage of an eer” test is d
re is on the ses on the
set up for thh such a bugular outlaye tests used account. Ie deductibion than the business
enditure, pas an integr asset wou
the expendicial accoul accountin usually detnd accountidiffer from o support aciently cone expendituowledges t
equired for e different This makes an indicatnce expend
epairs and e tests will onsidering ding, Judgeduring benests were ca
t’s expenditurentages of a laperty, as parts distinct from
in 2006 in the first and maintenaAlthough omissioner cenue tests w
airs and mas are capita
ses as to wter of the ad, then in menduring bediscussed in
business distinction he earning siness oper
y. This testd to determIn a repairslity enquirye business structure tarticularly inral part of tld affect th
iture is accnting: Theg to the exterminativeing have di the treatmn approachclusive test
ure is on cathat for somrepairs and from the taes it even mtor of the aditure.
maintenanusually be the deduct
e Barber in efit test anapital or rev
e is clearly onsting characte
t of the disputm income earn
the small nd only repance expenf limited pronsiders thwas adopte
aintenance l or revenu
whether thesset being
most situatienefit beingn more deta
structure between eof profit, arates to obtt is also oneine whethe
s and mainty usually fo overall. Htest may stn circumstahe businesse business
ording to the test of appxpenditure, e. It needs fferent aiment for the
h that the ot by itself tpital or rev
me businessd maintenaax treatmemore difficuppropriate
ce expendiof greater tibility of co Case X26 d the businvenue in na
n capital accouer which imprtant’s partnersning process).
claims jurisported decisditure since
recedential he correct aed in this de
expenditurue in nature
e work done worked onions that w
g produced.ail later.
or busineexpenditurend expendtain regulae of the moer expendittenance
ocuses moreowever, in
till be a releances whers and the lo structure.
he ordinarplying ordin although o
s to be ms, and the e other. Whother tests to determinvenue accoses the nce nt required
ult to rely o tax treatm
ture, somerelevance t
osts to relied on th
ness structuature. At [
unt and was roved an ship’s
sdiction of tsion to adde the relev value giveapproach toecision.
re is solely e, the
e has . If
will .
ess e on iture r ore ure
e on the evant re the oss
ry nary of
hile have
ne unt.
d for n
ment
e of than
he ure 16]
the ress ant n the o the
a
Anal
Has asse
111.
112.
113.
114.
Commiscapital/rdeductibmaintenon work most of legislatiodifficult where thcapital/rindividuarepairs awhen apfrequentrepairs aexpendit
lysis of ca
the work dt, or substa
As a staidentifiedis whethrenewal the work
This is cwork doincurred
One of tprincipletherefordoes supan assetcase conof a buildone to and not to repairrecoverabetween
“RalerethwPawreRmw
This prindecidingrepair of
sioner consrevenue tesbility of repance cases done to anthe repairson or in diffto extract phe courts hrevenue tesal fact situaand maintepplied careftly offer theand mainteture of a ca
ase law
done resulteantially the
rting point d asset is d
her the wor of the assek done will
onsistent wne results i is capital e
he earliest e is Lurcott.e it does nopport the pt, or substansidered theding. The that buildin a renewal r, the cost oable from thn a repair aRepair” and “rlways involveeaks; repair isenewing the phe decayed tim
which are crackart of a garde
with new mortaestoration by
Renewal, as dmeaning by twhole subjec
nciple from g whether ef an asset,
siders it remsts with theairs and ma
s can help tn asset is cas and maintferent jurisprecise prinave appliedsts togetheations. Nonnance expe
fully, the spe best guidanance expe
apital natur
ed in the ree whole of t
when deciddeductible ak done haset, or substbe capital
with the “idein the createxpenditure
authorities. While thisot address rinciple tha
antially the e recovery whole buildng by replaof the buildof the workhe tenant. nd a renewrenew” are nos renewal; ren
s effected by hpaint. A roof fmbers by sounked, broken, o
en wall tumblear, and, so fary renewal ordistinguishedhe entirety nt-matter und
Lurcott haexpenditureand therefo
24
mains appre body of caaintenancetaxpayers dapital or retenance cassdictions. Inciples fromd a combinr with repanetheless, enditure, thpecific repaance on theenditure anre.
econstructiothe asset?
ding whethas revenue s resulted intantially thein nature.
entifiable ation of a nee.
s used to sus case was the capitalat the recon whole of a of the costding was idacing a wallding. As a k done to th Lord Buck
wal at 923: ot words exprenewal of a pahacking out thfalls out of repnd wood; to sor missing; toes down; repar as necessaryr replacemend from repainot necessarder discussio
s been appe has been ore whethe
ropriate to sases that s
e expenditudecide whetevenue in nses being dt is also de
m the repaiation of theirs and mawhen consihe Commisirs and mae boundariend repairs a
on, replacem
er the cost expenditun the recone whole of
asset test” iew identifia
upport this not an inc or revenuenstruction, n asset is ct of replacinentified as was considresult, undhe building
kley comme essive of a clert; of a subordhe putties, putpair; the necesubstitute souo make good tair is effected y, new bricks nt of subsidiair, is reconstrily the wholon. [Emphas
plied by theincurred on
er the expe
supplementpecifically are. The repther expendature. This
decided undespite it somrs and maine traditionaintenance cidering the sioner consintenance ces betweenand mainten
ment or ren
of work dore, the first
nstruction, rthe asset.
in BP Austrble asset th
repairs andome tax cae nature of replaceme
capital expeng a wall th the asset, dered only
der the less was found
ented on the
ear contrast. dinate part. Atting in new ossary work is nd tiles or slathe flashings, by building it or stone. Reary parts of ruction of the but substais added]
New Zealan the replacnditure was
t the generaddress thepairs and diture incus is despiteder differenmetimes bentenance cal concepts to deductibilisiders that,cases n deductiblenance
newal of th
one to an t considerareplacemen If it has, t
ralia - wherhe expendi
d maintenaase, and f work donent or renewenditure. That formed and the wo to be a repsee’s covend to be e difference
Repair A skylight ones, and to replace tes for those and the like. up again
epair is a whole. he entirety, antially the
and courts cement or s capital or
ral e
rred e nt eing ases
o ty of ,
e
he
tion nt or hen
re the ture
ance
e, it wal of The part ork pair ant
e
in
r
115.
116.
117.
118.
119.
120.
revenuein the Sutrack waexpenditRevenue
Hwaop
In the C980 that
Inrecop
In Hawkdid to itsby job bresulted seven in
Trethsyex
As notedexpenditreplacedthe who
This poin1,518. Thomestesubstantwiring asargued thomestedistinguiHowevercould noreconstr
At 1,522Awcarecaca
The worwhetherwhole oflooking aAucklandnoted at
. The Courupreme Coas not a repture. Mollee [1968] NZaving reached
work done in remount soughtr "alteration",lace of what w
ourt of Appt: n the result, teplacing the oonstructed suremises.
kes Bay Pows urban res
basis over m in the crea
n her summhe result in thesidential distherefore that ystem; not a xpenditure a “
d in Aucklanture does nd or renewele of the as
nt is furtheThis case cead. Sometial replaces well as rethere had nead and thaished it fror, Judge Baot be regardruction of th
2 Barber J sAfter a careful work undertakeannot be regaeconstruction apital nature aapital point of
k done to tr the work df the asset at the workd Gas, Povet 15,024 of
rt of Appeaurt that thepair and theer J in AuckZLR 193 (Sd this decisionespect of it, at to be deduct but by the co
was, substant
peal Richmo
he appellant horiginal shell trbstantially of
wer Goddarsidential dismany yearsation of a n
mary that: he present casribution systethe urban resrepaired syste“new” underg
nd Trottingnot only arised. Capital sset is reco
r illustratedoncerned r structural ment of fra
e-piling andnot been a at much of m the new arber foundded as repahe homeste
stated: analysis and en by the objearded as “repa of the homesand was incurf view.
the asset mdone is so sis reconstr
k done overerty Bay El Auckland G
25
l in Aucklane constructerefore thekland TrottinSC) at 205 hn [that the traand find, on alted by the cluonstruction ofially, the who
ond J suppo
has failed in mrack by a new new material
rd J was satstribution s, was a tot
new asset.
se is that subsem has been psidential systeem. Thus, Hawround urban r
g (SC) and Hse when an expenditunstructed,
d by the derepairs and parts of thamework, ld extensivecomplete rthe origina track in Au
d the buildinairs. The wead.
consideration ector on the hairs or alteratistead and, in mrred in the im
must be looksubstantial ructed, replr more thanlectric and HGas (CA):
nd Trottingtion of a ne cost of theng Club v Cheld: ack was the asl the evidenceb was incurref what was suble of the 1960
orted Molle
my opinion to w track of greas is either a re
tisfied the wystem, althal reconstr At 13,707,
stantially the placed undergm is a new anwkes Bay Powresidential dis
Hawkes Ban asset is cre may alsoreplaced o
ecision in Ca maintenane house weinings, inte exterior cleplacemen
al structure uckland Trong work dowork involve
of the evidenhomestead waons”. The womy view, the eprovement of
ked at in its that the waced or renn one incomHawkes Ba
g upheld Mow track in pe work doneCommission
sset] I revert e available, thd not by way bstantially a n0 track.
r J’s finding
show that theater depth andepair or altera
work Hawkhough carrieuction proj, she conclu
whole of the uround. It follo
nd different diwer has acquirstribution syst
y Power, caompletely ro arise wher renewed.
ase J92 (19nce work doere retainederior joineryadding. Tht of the orig remained. otting (SC ane was so ed the com
nce I find the bas so extensivork involved thexpenditure w the premises
s totality tohole, or sunewed. Thme year as y Power. B
oller J’s decplace of ane was capitner of Inlan
back to the hat the of "repair" new track in
g and held
e work of d ation of
kes Bay Powed out on aect that uded as po
urban ows istribution red by its tem.
apital reconstructen substant
987) 9 NZTone to a fard but therey, plumbinghe taxpayeginal This and CA). extensive i
mplete
building ve that it he complete was of a s from a
o decide bstantially is can inclu was the caBlanchard J
cision old tal nd
at
wer a job
int
ted, tially
TC rm e was g and r
t
the ude ase in J
121.
122.
Has
123.
124.
125.
Twcobyinb
A decisiothe whoor renewto be masimply bhave takthis Inteof the wwork dothe assematter o
Howeveris capitathe workor substbe capitaasset. T
the work d
Where rreplacemthe assecharacteor reventhe asse
In Aucklthat the work falthe asseacknowlmaintenevery sitnature. “repair” objects dHe comm
ApdciciLu
His Lordshort of substantdetermincharacte
…it
he work donewhich was of aonveyor of gay artificially tr
n separate inceing effected.
on as to whle, or subst
wed may noade, especibeing kept iken into accerpretation work done”.
ne to the aet and the cof fact and
r, when detal or revenuk done to aantially theal expenditThis issue is
done change
epair work ment or renet, then furter of the asnue in naturet’s distinct
land Gas (P cost of wols short of
et, or substedged thatance and dtuation. He Lord Nicho and “replado not lendmented at Authority on thhysical objectoes the naturircumstances ircumstances.urcott v Wake
ship consid being a rectially the wning the naer of the ob… sometimes r falls far short
in a particulan ongoing pros. The questireating as sepome years de
hether the wtantially theot always bially when cn a servicecount whenStatement These facsset, the s
cost of the degree.
termining wue in naturen asset has
e whole of tture if it hass discussed
ed the char
done to annewal of thether analysset is requre. By cha nature.
PC) Lord Nicrk done to resulting inantially the sometimes
deductible, e considereolls noted thcement” is
d themselve 15,706: he question ofts to which thee of the work may be unhe This is true
ely & Wheeler
dered that iconstructiohole of the
ature of thebject”. Lordepair may nott of being a re
26
ar year is propogramme to reion is: what w
parate works peny the reality
work done e whole, of
be easy. Hocomponenteable conditn making su at paragra
ctors includeize and impwork done
whether exe, it is not es reconstruthe asset. s the effect
d next.
racter of th
n asset fallse identified sis on the eired to deteracter of th
cholls clarif an asset isn a reconstre whole of ts the work but that wi
ed that somhat authori only of limes easily to
f repair or repe test of repa done. Judicialpful or misleaeven of the ce [1911] 1 KB
in cases whn, replacem
e asset, thee expenditud Nicholls st be the approeplacement of
perly to be seeeplace all the
was being achiportions of any or minimise
to the assef the asset owever, it its of an asstion. Someuch judgemaph [160] ue indicatorsportance of. This enqu
penditure fenough onlucted, repla The cost oft of changin
e asset?
s short of b asset, or s
effect of theermine whehe asset, w
fied that it s deductibleruction, renthe asset. done may ill not nece
metimes repty on the d
mited assistao this “exerc
lacement is oir has to be apal dicta applicading when apelebrated obs905 at p 294
here the woment or ren important re is “the e
stated at 15opriate descripf substantially
en in its overa low-pressure ieved? A taxp overall progrthe extent of
et is so subis reconstrus a judgem
set are renee of the facments are sunder the hs such as thf the replacuiry will alw
for work doy to determ
aced or renef the work ng the char
eing a recosubstantialle work doneether the cohat is being
is not righte as “repairnewal or reSimply put well be repssarily be t
pair work cadistinction bance and thcise in char
f limited assispplied vary wiable to one sepplied in differervation of Bu ….
ork done tonewal of the considerateffect of the5,706: ption of work
y the whole of
all context, e system as a payer cannot ramme done what is
bstantial thaucted, repla
ment that neewed insteactors the coset out laterheading “Sche extent ocement partways be a
one to an asmine whethewed the adone will sracter of th
onstructiony the whole on the osts are cag referred t
t to presumrs” where tplacement t, Lord Nichpairs or the case in an be capitbetween hat some racterisatio
stance. The idely. So et of rent uckley LJ in
o an asset fe asset, or tion for e work on t
even though f the relevant
at aced eeds ad of ourts r in cale of the ts to
sset her asset, till e
, e of
pital to is
me hat of holls
tal in
n”.
falls
the
126.
127.
128.
129.
Natu
130.
suim
If the wocapital eof changrevenue
Lord Nicwhetherof the asat 15,70
Ifrenthocore[E
In Auckldone anexisting had effefunction instead gas. Lo
Fachpaa
This Intethe effec
the
the
ure of the w
Lord Nicthe basisincludingasset. L
…itsua
Tv 5th(e(1exhaa
ubject-mattermportant cons
ork done toexpenditureging the cha in nature a
cholls went r the work dsset: the na07: f a significant eplaced wholeormally be rehe new pipes nes. The woharacter of tr making goepair, the foEmphasis add
land Gas (Pd the mate gas netwoctively bee of the old had becomrd Nicholls ar from restorhanged the chortion of it hand steel servind advantage
erpretation ct of the wo
e nature of
e scale of t
work done
cholls in Aucs for his fing the choiceLord Nicholl… sometimes r falls far shortubject-matterlso an impor
his is explicit, Commissione8 at p 72, Winhing to a conemphasis add1889) 2 TC 48xisting fashioneld this substnd contrastelong the line
r. The effect osideration.
o an asset he. If the woaracter of tand deduct
on to identdone to an ature and t
portion of thisesale with newgarded as repare made from
ork may be othe existing od specific lermer would ed]
PC) it was foerials used brk had been abandonpipes had ce housing f stated at 1ring the gas dharacter of thed been upgraces were supe
es mentioned a
Statementork done on
the work d
he work do
ckland Gas nding that te of materils stated atepair may nott of being a rer. The effectrtant conside
or implicit, iner of Taxation ndeyer J obsendition it fored). In Highla85 parts of then, but with stetitution was ed this with te: that “woul
27
of the work on
has the effeork done tothe asset thtible.
tify two fac asset has tthe scale of
s series of linw pipes, the wpair of the exism materials wf such a natu system. Thieaking pipes do more tha
found that aby the gas n changed.ed and repchanged sofor the poly15,708: distribution syse existing gasded. Substanerseded by poabove.
t now consin the chara
done, and
one.
s (PC) referthe nature ials used, mt 15,706-15t be the approeplacement oft of the workeration.
n several deci of the Comm
erved that repmerly had wland Railway Ce main railwayeel rails and h a material ataking awayld not alter t
n the characte
ect of chano the asset he cost of t
ctors as beithe effect of the work d
ked pipes is ework may readsting system.
which perform ure and scalis is to be cos or joints. Tan repair wha
as a result company t. A signific
placed. It wo that they yethylene p
stem to its ors distribution sntial portions olyethylene pi
iders the twacter of an
red to seveof the work
might chang5,707: opriate descripf substantiallyk on the char
ded cases. Inmonwealth of Apair “involveswithout changCo v Balderstoy track were rheavier chairsalteration any any worn rathe characte
er of the objec
ging its chadoes not hhe work do
ng relevantof changingdone. His L
ffectively abaily go beyond This is espec differently froe as to channtrasted wit
The latter woat was dama
of the scalethe characteant portion
was also fou no longer cpipes that n
iginal state, thsystem: a signof the cast-iropes having th
wo factors fasset:
eral decisionk done to thge the char
ption of work y the whole of racter of the
n W Thomas &Australia (196s a restoratioging its charon (Surveyor ore-laid, not aft. The Court od great imprails and rener of the line”
ct is also an
aracter it whave the effone will be
t when decg the characLordship st
andoned and d what would cially so if om the old ge the th replacing ould be aged.
e of the woer of the
n of the netund that thcarried gasnow carried
he work nificant on mains e differences
for determi
ns that formhe asset, racter of th
even though f the relevant object is
& Co Pty Ltd 5) 115 CLR on of a
racter” of Taxes) fter their of Session rovement, ewing them ” (see the
will be fect
ciding cter tated
ork
twork e
s, but d the
ning
med
e
131.
132.
133.
134.
135.
LodPrtoaKpcaCbfra
If the nahas gonecost of t
Usually timproveadvantadeterminto an ascapital inchange t
One decdecision Rhodesiademonst
In Highlacompanyincurred
Tmfareapsisha
In contraRailway the effecwas founMacmilla
Tthacoofexbprena
ord President,ictum in Rhodrotectorate [1o restore it tgainst incom
KB 719 at p 72perpetually faapital expen
CLR 102 a danbetter ceilingrom the type theatre bus
ature and se beyond rethat work is
the characts or enhangeous. Honative of caset will resn nature ththe charact
cision that L of Highlana Railways.trate the ef
and Railway’s main ra was capitahen when we
must be kept inashion; it is noenewing themlter the chararoperty posseubstitute ons a material aleritable estategainst capital
ast, the Pri and held thct of changnd to be anan stated ahe periodical hey wear out n ordinary incontinuous is nf renewal whexpenditure heeen worn out aid without deestoring themot result in thppellants' exis
, Lord Inglis, adesia Railways1933] AC 368 to its former me. Consisten29, Rowlatt J oalls down or
nditure. In FCngerous ceili. Kitto J reg
e of repairs psiness. [Emp
cale of the epairs, ands capital ex
ter of an asces the asswever, an apital expenult in some
he work donter of the a
Lord Nichold Railway, . These twffect the wo
y the courtilway line c
al in nature come to the qn view that thot taking away
m in whole or icter of the lin
essed by the Ce kind of raiteration and ae belonging to. [Emphasis a
vy Council hat expending the cha
n ordinary it 374: renewal by seby use is in nocident of railwnot and cannoen it comes toere in question in earning theeduction in re to a state in e creation of sting line in a
28
at p488). Thes Ltd v Collect where the co condition wntly with this, observed that needs paintC of T v Westeng in a cinem
garded the wproperly allohasis added]
work doned has changxpenditure.
sset will be set in someimprovemenditure. The degree ofne must goasset.
ls relied on which the
wo railway cork done ca
t decided thchanged itse. The courquestion of thhis is not a mey rails that arn part along we; it would no
Company. Buil for anothera very great io the Companadded]
in Rhodesiditure on rearacter of tncident of
ections of the o sense a reco
way administraot be made goo be effected nn was incurrede income of pspect of such which they coany new asse state to earn
e Judicial Comtor of Income ost of relayin
was held to b in Mitchell v Bt replacementing with a bern Suburbs Cma was repla
work as differowed for in th
e to an asseged the cha
changed we way or maent to the ahis is becauf improvem beyond or
n was the wPrivy Coun
cases are ofan have on
hat alteratios character rt held at 4he alteration oere relaying ofre worn out orwith the wholeot affect the nut what has br, steel rails mprovement
ny, and so stat
ia Railways pairs to thehe line. Inrailway adm
rails and sleeonstruction ofation. The facod annually dnecessarily a cd in conseque
previous years wear, and reould continue et; it was incu revenue.
mmittee applie Tax, Bechuanng a railway e a legitimatBW Noble Ltd
nt of a railingrick wall wo
Cinemas Ltd (aced with a rent in degrehe working e
et indicatesaracter of th
when the woakes it morasset will nouse almost ent to that
rdinary rest
well-known cil also appften compa the charac
ons made t so that the88:
of the main linf the line afterr partially wore line. That wature of the h
been done is for iron railson the corpusted is surely a
distinguishe railway linstead, the ministration
pers of a railwf the whole ract that the weaoes not rendecapital chargence of the rai on which taxpresented theto earn incomrred to mainta
ed this naland line so as te charge
d [1927] 1 g which ould be 1952) 86 new and ee and kind expenses of
s that the whe asset, th
ork done re ot always b any repair t asset. To toration and
Scottish plied in ared to cter of an a
to the e expenditu
ne itself, it r the old rn out, and would not heritable s to s. Now that s of the a charge
hed Highlanne did not expenditurn. Lord
way line as ilway and is ar although er the work e. The ls having
x had been e cost of me. It did ain the
work he
be work be d
asset.
ure
nd have re
136.
137.
138.
139.
Lord MacHighland
Tob[1chimcaimst
Lord NicCinemasRobins Bwork dooutcomeof the wdemonstwork dofact.
In Westearchitectof replacreplacedmaterialmaterialthan meand had was diffeexpense
TtothgInceadthnoreRLofawtrca
Robins Bbuilding great pato it courenewingcorrugatgirders hground fWestern
cmillan comd Railway ahe contrast beriginal conditirought out in 134] of this stharge againstmprovement oapital. In themprovement; tate.
cholls in Aucs. That casBros Ltd (19ne to repaie. Looked aork done ctrate how tne. The as
ern Suburbt considerecing the ceid with a news than thoss were ava
eet a need f consideraberent, in dees of a theao decide wheto be charged though the diffeneral statemn this case teiling, a maj new and beegree, but in he working exeed for restorver the old oepair bills in th
Rowlatt J. in Mordship there alls down or w
will not fall dowruth is, I thinapital asset
Bros involve was over 4art of it wasld be for prg some of tted asbestohad to be infloor was re
n Suburbs C
mmented oand Rhodesetween the coon and the co the passage jtatement], an income the e
of the line is e present instathey merely m
ckland Gas se is often c966) 43 TCr buildings,at togetheran have onthe particulssessment o
bs Cinemas d it was imiling was exw ceiling cose materialailable. Thefor restoratble advantaegree and itre businesther a particulto capital or rference betwe
ment (Sun Newhe work donjor and impoetter ceiling. kind, from the
xpenses of a thration; it provone, includinghe future. Th
Mitchell v. B. W observed, if y
wants repaintinwn or will not nk, that the and that its
ed extensiv400 years os rotten. Threservationthe roof timos. Some wnserted to se-formed inCinema, the
29
n the differsia Railwaysost of relayingost of relayingjust quoted [id while the fo
extra cost incuequally recognance the renewmade good th
s (PC) also considered
C 266 (Ch)., but the cor, the two cn the characar materiaof the work
a damagedmpractical toxpenditure onstructed s previousle court heldtion. The rages. It wan kind, fromss. Kitto J lar item of ex
revenue accoueen the two acwspapers Ltd. ne consisted ortant part of The operatioe type of repaheatre businevided a ceiling the advantaghe case resemW. Noble Ltd [you say, “I wing; I will abol want paintingnew ceiling cost was a c
ve repairs told and for he building
n purposes mbers and rwalls on thesupport then concrete. e court in R
rences betws at 376: g the line so a the line so ase, the passag
ormer is recogurred in the lanized as a propwals effected e line so as to
referred to with Conn Both caseourt in eachcases illustrcter of an als used cank done will
d ceiling wao repair. T on capital from more y used, eved that the wesulting ceas held thatm the usuastated at ppenditure on
unt is apt to beccounts is clea v. Federal Co of the replaf the structu
on seems to mairs which are ess. It did mung having coge that it redubles one of th1927] 1 KB 7ll not have a rish it and I w
g”, that is a cawas an impr
capital charg
o leased re the most p was proteonly. The replacing the lower flooe upper sto In contras
Robins Bros
ween the sit
s to restore it s to improve ie quoted at p
gnised as a legtter case in thper charge agconstituted noo restore it to
FCT v Wes (HM Inspees involved h case reacrate the effeasset. Theyn affect the always be
as replacedhe court deaccount. T suitable men though work done diling was nt the repair
al allowable age 105: business preme a matter of ar enough as aommissioner ocement of th
ure of the theme different, n properly allowch more than
onsiderable auced the likelihe illustrations19, at p 729. railing which pill build a brickapital expendirovement to ge. [Emphasis
etail premispart was oricted and anwork done he slate rooor were remoreys. The st to the de held that a
tuations in
t to its it is well aragraph gitimate he gainst o its original
stern Suburector of Tax significantched a diffefect the naty also nature of ta question
d because aecided the The ceiling
modern equivalent did much mew and betr work donee working
mises ought difficulty, a matter of
of Taxation). he entire eatre, with not only in wed for in
n meet a advantages ihood of s given by As his perpetually k wall which ture. The a fixed s added]
ses. The iginal, but ny work do included of with moved, so s rotten timbecision in although th
rbs xes) v
erent ture
the of
an cost was
more tter e
a one
steel ber
here
140.
141.
142.
was exterevenue
…copwcaexwabbimpethpthin
While thseem cothe subtis not wione casecases is simply bmade as
In Westetaxpayeceiling cproductsrepairedlikely to different400 yeacomponewere apin Robinmaintainand in threplacedreconstrbased onbeing recontrastnecessabuilding
It is alsoLord NicNicholls where thbeing remakes itthat worinfluenceIt could ITA 2007
ensive repla account.
… this was expontinue to earurpose but by
would enable itarrying out thxpect with an
were being carltered. But thuilding does nasis that the w
mplicit in the Cproduce somexisted. Uponhis expenditururpose of enaherefore in myncome. [Emp
e decisionsontradictorytle factual dise simply te is to be p that when being repairs to the nat
ern Suburbr made by onstructed s were avai using the be a deduct approach rs old and ents as a npropriate fos Bros the
n the buildihe same locd or reneweructed, repln its particu
epaired, thet, the work ry, went be.
o interestincholl’s obse makes it chat work reeconstructedt clear thatrk changes ed by the lo be suggest7, the expe
acement ofBuckley J’senditure incurrn profits fromy putting the Ct to continue tese works cery extensive re
rried out at a the fact that thnot seem to mwork producedCommissionerething new bn that basis it re as a capitalabling the Comy judgment exhasis added]
s in Westerny, the Commdifferences to view thereferred ov major comred to a serture of the
bs Cinemas choosing to from a supilable. The equivalent ctible repai to maintainprotected),atural part or construccompany dng’s inherecation. Theed, nor wasaced or renular facts, we work done done to theeyond resto
g to considrvations in lear that w
esults in thed, replaced work done the characower court ted that if senditure wo
30
f the existins reasoning rred by the Co
m its businessCompany’s exto use that asrtain structuraepair of a builtime when bu
here were alteme to be a good something nrs’ finding thabut to repair seems to mel expenditure.
mpany to contxpenditure wh
rn Suburbs missioner c that make e cases as iver the othe
mponents ofrviceable cowork done
the court fo replace thperior mode inference materials tr. In Robinning the bu, and viewet of the repaction at the did not seekent utility. e building ws substantianewed. Thwhile the be to the bue ceiling in oration and
der the deci Auckland Gork done toe asset, or d or renewee to an assecter of the a finding of fsimilar factould be fou
ng asset, th at 274 waompany with , not by acqui
xisting asset insset. No doubal alterations wding over 400ilding techniqrations in the
od ground for new. On the at the result r something that there is It was expe
tinue to earn ihich would pro
Cinemas aconsiders th decisions irreconcilaber. What isf an asset aondition, a to the asse
focused on he damageern productis that if ththen the wons Bros, theuilding (mued the replaair process time the wk to improvThe buildinwas not comally the whoe court fouuilding wasilding did n Western S changed t
ision in RobGas (PC) reo an asset substantial
ed. As seenet will be caasset. Bucfact that ths as in Robnd to be ca
he expendits that: a view to enaring some ass
nto a state of bt in the courswere made, a0 years old, wues have com structural deproceeding upcontrary, I thiof this workwhich had p no ground fornditure incurrts profits, andoperly be char
nd Robins Bhe two casen this areale or that ts clear fromare replaced judgementet.
the improvd ceiling wt when othe ceiling haork would he company ch of whichacement of , using mat
work was dove the buildng remainedmpletely reole of the bnd in Robins improved not go beyoSuburbs Cinhe characte
bins Bros inegarding Luwill be capilly the whon, Lord Nichapital expekley J appe
he work donbins Bros arapital in nat
ture was on
abling it to set for that repair which se of as one would when repairs mpletely etails of the pon the ink it is
k was not to previously r regarding red for the d was rgeable to
Bros might es demonst so difficult
the approacm these twod instead ot has to be
vement theith a new er equivalead been have been took a h was f major terials thatone. Arguading but ond the same
econstructebuilding ns Bros tha as a result
ond repairs.nemas, whier of the
n the light ourcott. Lordital expend
ole of the asholls also nditure wh
eared to bene was reparose under ture on the
n
trate t. It ch in o of
e
ent
more
t ably, ly to
e size d,
at, t of . In le
of d iture sset,
ere airs. the
e
Use o
143.
144.
145.
146.
147.
basis thato a recoasset, or
of more mo
The decito makedone.
In Westemade froTen Testaffixing concludeproduct availableproduct purposenew battlonger limouldedcompanyThe comceiling) aconcludeceiling ththat “thetherefor
These saAuthoritthe replatype of taltered idamagedentire rocapital in
In Aucklin repairtechnolostates:
Itbitde
Howevercharactethat whethen thethe fact new polymade ofthat the existing
at the charonstructionr both.
odern mate
ision in Wee repairs ca
ern Suburbom sheets t material hthe sheets ed that it w Ten Test we - celotex of this type. Instead htens that wfe, was har
d. Even thoy still got a
mpany consand chose ed at 106 that providee new ceiline capital ex
ame principy decision, acement oftiled roof dit. The rood sheets ofoof with a “n nature.
land Gas (Prs and mainogy may no
t often happenetter than theself, change tescription of the
r, while theer of an assen new mateir use did r that a signyethylene pf materials nature and gas system
acter of the, replacem
erials
stern Subun have an i
bs Cinemas of an impohad become to the ceili
was practicawas not avaand caneitee as he conhe replacedwere attachrder, betterough the ara price for ridered bothnot to repahat the resed considerng was an ixpenditure.
ples were a Case F78 (f a cracked id not restof could havf fibrolite bubetter” typ
PC) Lord Nicntenance wot in itself c
ns that, with ie original and the character e work.
e use of newset, Lord Niterials wereresult in a cnificant portpipes, togetwhich perfod scale of tm was chan
31
e building hent or rene
urbs Cinemaimportant b
the ceilingrted produe dry, bucking joists hally impossiailable, althe. Howevensidered thed the ceilinged to new r suited to rchitect hadrepairs to thh options (iair but to result of the wrable advanimproveme.
pplied by J(1984) 6 N fibrolite roore the asseve been reput instead t
pe of tiled r
cholls also work. He nochange the
improvements will last longeof the larger o
w materialsicholls wente used extechange of ction of the ther with thormed diffehe work wa
nged (at 15
had changeewal of sub
as illustratebearing on
of the theact called “T
kled and briad drawn tible to repaough two e
er, the archem to be ug with fibroceiling joistdecorative d advised ahe ceiling ue, repair or
eplace the wwork done wntages overent to a fixe
udge BarbeZTC 59,95
oof of a rentet to its ori
paired by ththe ownersoof. This m
discussed toted that th character o
s in technologer or function object or, hen
s may not it on and foensively ancharacter ogas networhe fact thaterently fromas such tha,708).
ed, or the wstantially th
es how the the nature
atre was prTen Test”. ittle. Manyhrough. An
air the ceilinequivalent pitect wouldnsatisfacto
ous plaster,ts. The pla treatment against repausing equivar replacemewhole ceilinwas a “newr the old oned capital a
er in the Ta1. Judge Btal propertyginal chara
he replacems chose to rmeant the w
the use of nhe use of neof the asset
y, a replacembetter. That ce, the appropr
n itself chaund in Aucd performef the assetrk had beent the new pm the old piat the chara
work amounhe whole o
materials ue of the wor
redominantOver time
y of the pinn architect ng. The products wd not use anry for this , attached taster had a and could air, the cinealent mateent of the ng. Kitto J w and bettene. He founsset” and
axation RevBarber decidy with a neacter but ment of thereplace the work was
new materiewer and bt. At 15,70
ment part is does not, of riate
ange the ckland Gas ed different. He held tn replaced pipes were ipes, meanacter of the
nted f the
used rk
tly the s
ere ny
to be ema rials.
r” nd
view ded
ew
ials better 06 he
(PC) tly, that with
nt e
148.
149.
Othe
150.
151.
152.
153.
154.
With regcompletHowevermore adpreviousa decisiomaterialthe work
Howevermaterialof the ascapital in
er factors p
From timfactors wrevenueinclude t
the
the
the
the
the
The casethe workdone on changed
For examindicatorJ comme
Itesa
Similarlyfor the wthe railwimprovefrom thethe assehas chanJudge Bathe buildwas capexpendit
It is somindicate there is expenditthat if thand corrgiving m
gard to the ing the worr, where di
dvantageously, that maon is made s a changek done will
r, regardless are used sset, is recon nature.
otentially a
me to time when decid in nature. the effect o
e value of t
e income-e
e useful life
e function o
e operating
es show thak done. Th the asset w
d.
mple, an inr of work bented at 15t is worth obsessential elemedds value to t
y, the incomwork done tway line in Hment” evene outlay”. Tet alone cannged the charber in Cading did notable of genture.
metimes sug the work dno increaseture. Howehe old gas nroded sectio
more service
nature of trk does notfferent mats or performay indicate to use bette in the chabe capital e
ss of the ch extensivelyonstructed,
affecting the
the courts ing whethe The typesof the work
the asset;
arning capa
e of the ass
of the asset
g capacity o
at these face courts inwhen deter
crease in veing of a ca
5,008: erving also thent in capital ethe object whi
me-earningto the asseHighland Ran though thTherefore, nnot alwaysharacter of ase X26 in rt result in a
nerating, an
ggested thadone to an e in an asseever, the Cnetwork haons of pipe e and the b
32
the work dot necessarilterials are ms or funct a change iter materia
aracter of thexpenditur
hoice of may so that th, replaced o
e nature of
have been er the works of factors done on:
acity of the
set;
t;
of the asset
ctors are rastead consrmining wh
value by itseapital natu
hat it is hard toexpenditure wich is restored
g capacity oet to be capailway werehe companya compariss accurately the asset. response toany increasnd therefor
at the exteasset is of et’s useful ourt of App
ad been rep the netwo
benefits wo
one, the usy mean thaused and ations betten the chara
als instead ohe asset wie.
aterials, as he asset, oor renewed
f the work d
asked to ta done to an that the co
e asset;
t.
arely determsider the ovether the c
elf has not re. In Pove
o see the addwhen restoratid or repaired.
of an asset pital in natue found to y “derived son of the iy determin This conclo an argumse in the ree the cost c
nsion of ana capital nalife that ma
peal in Auckpaired by mrk would huld have be
e of new mat the asses a result tr or differenacter of theof the samell result and
seen abover substantia, the expen
done
ake into acn asset is courts somet
minative ofverall effectcharacter of
been consierty Bay Ele
ing of value aion or repair w
does not neure. The chbe a “permno additionncome-eare whether tusion was ent that thntal incomecould not b
asset’s usature. Coray indicate kland Gas n
merely replaave been ceen long la
materials in et is improvthe asset isntly than ite asset. We or equivad the cost
e, where neally the whnditure will
ccount otheapital or times cons
f the naturet of the worf the asset
idered a reectric Blanc
as an work usually
eed to incrhanges madmanent nal revenuerning capacthe work dalso reache
he work done the buildi
be capital
seful life maresponding revenue noted at 15acing the jocapable of sting. Furt
ved. s t did here alent of
ew ole be
er
ider
e of rk has
liable chard
ease de to
e ity of one ed by ne to ing
ay gly, if
5,022 oints
ther,
155.
156.
157.
158.
159.
Scale
160.
the Courit is not done to an assetrevenue
In Aucklfunctionreliable gnature. problem
TCInmexsumstamgca
Lord Nic …ooth
A furthein unsoureplacemwould bemeant thoutcomeadditionbrought characte
This sugbenefit, done dochanged
In summuseful lifdone, cadone to such facasset ha
e of the wo
Another to an asdone. Twork dobeing re
rt of Appeaessential thbe capital t’s useful lif nature of w
land Gas (Pal position guide by its He explain can be solhe Court of A
Court] reachedn particular, h
made at a levextent of the ouch as existed
may be solved tructure. Or ind providing a
much the samuide. If the lapital nature.
cholls then s… the desire tout work of a cut to the phyhe work. [Em
r point to nught benefitment pipes e able to cahe overall ce was not aal capacity about by ter of the ne
ggests that the fact thes not prev
d.
mary, factorfe, functionannot be rethe asset.
ctors to supas changed
ork done
important set has cha
This is also ne has resu
econstructed
l observed hat the life in nature. fe is not alwwork done
PC), Lord Nof an assetself as to w
ned at 15,7lved in morppeal held, an
d a conclusion his comparisonel of abstractioperation carrid here may be by work whict may be solva new one. In
me in the twolatter alternat [Emphasis a
said at 15,7o solve a maincapital nature.ysical asset mphasis adde
note is that ts. For exa meant thatarry gas at capacity of a goal in its for future he work do
etwork.
where the at obtainingvent a findi
rs such as cn or operatilied on in is However,
pport an ove.
consideratanged the can importaulted in thed, replaced
33
that where of the orig This meanways a relia to an asse
icholls alsot before an
whether the08 that thisre than onend their Lords which did non of the function which paid ied out by Auce capable of bch would be reved by scrappn overall funo cases, but tive is chosen,added]
709 that: ntenance prob. The natureare what is dd]
t sometimesample, in At the new p a higher p the networelf, as the growth, it w
one, and as
work doneg the advang that the
changes tong capacitysolation to in some caerall assess
ion when dcharacter oant considere asset or sd or renewe
e the work ginal asset bs that the eable indicatt. Every fa
o noted thatd after the
e work dones was becae way: hips agree, tht reflect the reional position insufficient reckland Gas. A
being solved inegarded as a ring all or mucnctional term that is not b, the expendit
blem is not ince and extent determinativ
s work donuckland Gapipes, althoressure thark was increxisting sywas found s such indic
to an assentage was e character
an asset’sy, whether establish tases the cousment of w
determiningof the assetration whensubstantiallyed.
done creatbe extendeeffect of thetor of the caact situation
t a compari work is doe is capital use a main
hat Williams J eality of the wbefore and afegard to the nA maintenancen more than orepair of the ech of the existms the result by itself a relture may well
consistent wit of the workve of the cha
e to an assas the inserough smallean the old peased. Whstem alreadto be an im
cated a cha
et results innot a goal of the asse
value, ear or not a gohe nature ourts have thether the
g whether t is the scaln determiniy the whole
tes a new aed for the we work donapital or n is differen
ison of the one is not a or revenuentenance
[in the High work done. fter was nature and e problem one way. It existing ting structure t may be liable be of a
th carrying k carried aracter of
set may resrtion of the er in diamepipes. Thishile this dy had eno
mprovemennge in the
n an unsoug of the worket has been
rning capacoal of the wof the worktended to u character
he work doe of the woing whethee of the ass
asset work ne on
nt.
e in
sult ter,
s
ough t
ght k n
city, work k se of an
one ork er the set
161.
162.
163.
164.
165.
166.
When coaccount asset anasset.
As seen maintenasset is the idencapital/ra new asindicate indicatedrenewal work is ihad the nature. 380 km steel serservices of the ga
In Case its motoscale of capital in
Wcadsca
…
TrethTwrenca
It also fothe assethe moreWestern“major aconclusio
In Case manufacthe workcentral tcentral wreplaced
At 3,074Area
onsidering t the extent nd the busin
in Aucklanance expenso substantified asset
revenue prisset, or the that expend that even of substanin relation t effect of ch For examp of the netwrvices, amo respectiveas distribut
L68 (whichor replaced work done n nature. H
Whether expenapital in naturone, when relignificant thapital expen
…
he refitting ofepairs. The shat it was rohere was noth
was affected. estored in theew and much apital in natur
ollows that et being woe likely the
n Suburbs Cand importaon that the
N8 (which cturing plank done to thto the operaworking cord to a signif
4 his HonouAltogether, itemenewal of the lso significant
the scale of of the worness, and t
d Gas (PC)nditure is otial that it t or substannciples, on
e productionditure is ofn where thetially the wto the assehanging theple, in Auckwork’s cast-ounting to 2ely. The cotion system
h concernedand the se to refit theHe held at nditure is for “re, appears tolated to the ase work, relat
nditure is inv
f the “S” seemsheer scale ooutine. It wahing piecemeaEntire aspects fullest sense, extended lifere. [Emphasis
the biggerrked on or expenditu
Cinemas Kitant part of e expenditu
concerned nt), Judge Bhe plant thation of there of the baficant degre
ur commentm by item by central core pt replacements
34
f the work rk done, thehe cost of w
Lord Nichoon capital acis a reconsntially the w
ne-off expenn of an advf a capital ne work donewhole of theet, the moree characterkland Gas p-iron mains23% of theurts found
m.
d work doncond was re second bo 1,401: “repairs or alto depend on thsset to which tive to the w
volved.
ms much moreof what was s an extraordal about what s of the fabric, in some resp
e. The expends added]
r, more sign replaced isre will be otto J referre the structure was cap
the deductBathgate foat the mixee plant andatching planee.
ted: item there waparts in the cos by renewal
done the ce importanwork done
olls confirmccount whe
struction, rewhole of thnditure thavantage of nature. The to an asse asset, thee likely it isr of the asspolyethylenes and into 1 entire netw that these
e to two fisrefitted), Juoat indicate
erations”, or ihe scale and s it occurs. Th
whole, the m
e to me than adone tells aginary event in was done. Tc were replacepects with moditure seems t
nificant or ms, relative tof a capital ed to the faure of the tpital.
tibility of reound it signer was repl was housent. The co
as a significanoncrete makinof many statio
ourts may ce of the win the cont
med that repen the workeplacemente asset. Ut results in an endurine courts haet falls sho
e more subss that the wet and will e pipes wer150 km of twork and 3 were subst
shing boatsudge Keaneed the expe
s more substasignificance ofhe larger andore probable
an accumulatigainst the pon the life of thehe whole capi
ed. The vesseore modern mato me to have
more integrto the assetnature. Fo
act the ceiliheatre” wh
epair costs nificant in haced. The ed in the tontents of th
nt replacemenng process. Tonary parts. W
take into work done ttext of the
pairs and k done to tht or renewander gener the creatiog benefit, mave also ort of beingstantial the
work will ha be of a capre inserted the networ32% of the tantial port
s – the firste consideredenditure wa
antial and f the work d more e it is that
on of ossibility e vessel. ital entity el was aterials, to a
e been
ral the partt as a wholor example,ing was a
hen reachin
to a cemenhis analysis mixer wasower of the he tower w
nt and here were When they
o the
he al of ral on of may
the e ave pital into k’s steel tions
t had d the as
t of e, , in
g his
nt of ere
167.
168.
169.
170.
171.
172.
173.
athefa
Thereforimportana whole
Judge Bathe valuexpenditsuggestewhole vaother hathe assestated a
Taevinnthe[E
Judge Bainto accothat casHoweverconsisteimportanthe work
In HawkGoddard
Tva…Bca
In summwork invonly onenature”.
In the Cof the nahigh, foris difficufrom beiless expnot chanthe Comsignificain nature
Overall, and cost
re together cohe structural pntity, as a comairly obviously
re, when thnce of the p forms part
athgate alse of the asture. In keed an amoualue of the and, one-ofet before tht 3,073: he expenditurmount that is xpense is smalue of the a
ncrease in valuot regularly inhe asset prioxpenditure oEmphasis add
athgate’s dount in the e comparinr, in the Cont authoritynce of themk done to th
kes Bay Powd J said at 1he evidence faried. In the
…the fact of thay Power in itapital in natur
mary Goddavolved in the conclusion
ommissionature of exr example, ult. This doing revenueensive to rnge the cha
mmissioner nt the coste.
the courts t of work do
onsidered withparts housing mposite wholey, it was capita
he scale of tparts beingt of that con
so considereset can be
eeping withunt incurred asset, is mff expenditue work is d
re would gene regularly incu
mall and suboasset involveue of the assencurred, or suor to the worof the nature ed]
decision pro assessmen
ng the cost ommissioney as to how
m. The couhe asset, o
wer, when c13,706: rom the valua end, howevere matter is thts undergrounre.
ard J noted he total projn; that is, t
er’s view, cpenditure. if the replaoes not meae to capitaleplace an aaracter of thconsiders ts incurred,
consider thone, when
35
h the renewal or supportinge had such a qal and not rev
the work dg worked onnsideration
ed that the an indicato general cad regularly
more likely ture that is sdone is mor
erally be deduurred by reasoordinate in n
ed. On the otet, a change inubstantial in rk, may be mnot allowed a
ovides one nt of the na of the worer’s view, thw best to murts tend toof which cos
considering
ation experts r, it did not as
hat the degreend conversion
at 13,707 ject and ththat the ex
cost on its Sometimeacement paan the natu. Similarlyasset than he work dothat as a ge the more
he scale of deciding w
, replacementg the plant anquantity and vvenue in chara
one is beinn to the ass.
e cost of theor as to theapital/reven and that isto be revensubstantial re likely to
ctible also if ton of ordinarynature in relather hand worn its characte amount in r
more likely tos a deduction
example ofature and sk with the vhe courts d
make such c focus morst is only on
g the effect
… was extremssist in determe of expenditu programme c
that “the she money ependiture i
own is not es the cost arts are expure of the wy, in some cto repair it
one from beeneral proplikely the e
the work dwhether wor
ts and improvd equipment, value of work acter.
g considereset and to t
e work done nature of nue principls small, relanue in natur in relation be capital i
he expense isy wear and teaation to the k resulting in r or kind, of arelation to tho be capital under sec 10
f how cost ccale of the value of theo not provi
cost compae widely onne factor.
of the wor
mely interestinmining the keyre invested by
can only be re
scale and dexpended onn question
always a reof repair w
pensive or twork done hcircumstanc – but that eing capitalposition the xpenditure
done, includrk done is o
vements to the entire that I think,
ed, the the busines
e relative tthe les he ative to there. On the to the valuin nature.
s for an ar, or the whole a significant
an amount he value of
08(1).
can be take work donee asset. ide any risons, nor n the scale
rk done
g, although y issues. y Hawkes
egarded as
egree of thn it leads to is capital in
eliable indicwork can bethe repair whas changeces it may saving doe. That said
e more e will be cap
ding the exof a capital
ss as
to
e ue of He
en e – in
the of
e o n
cator very work d be es d,
pital
tent or
174.
Key
175.
revenuemore intof work nature.
When bodecision it is capi
points on
The Comcases on
If tof woTro
Exmachaincwil
Whfacthe
Wiin imthedifchamachacaptherepexWe
Chfuncanto sucof Au
DeextanthedoincGaPo
nature. Ttegral the rdone increa
oth the nat can be maital or reve
the natur
mmissioner n the nature
the work dothe asset o
ork will be cotting (SC a
penditure iaking good aracter of tcurred to rell be on rev
hen determctors to cone asset (Au
th regard tcompletingproved. Hoe asset is mfferently thaaracter of taterials instaracter of tpital expene asset, or placed or rependiture restern Subu
hanges to anction or opnnot be rel the asset. ch factors tan asset ha
uckland Gas
etermining ttent of the d the busine extent of ne to the acurred, the as (PC), Caswer)
he more imreplacemenases and th
ure and theade as to thnue in natu
re and ext
takes the fe and exten
one resultsor substantcapital expeand CA), Lu
ncurred to wear and tthe asset wepair or mavenue accou
mining whetnsider are tuckland Gas
to the naturg the work dowever, wh
more advanan it did prthe asset. tead of the the asset wditure. Whsubstantialenewed, thregardless ourbs Cinem
n asset’s vaperating caied on in is Instead into support as changeds (PC and C
the scale o work doneness, as we the work d
asset and th more likelyse L68, We
36
mportant thnt parts arehe more lik
e scale of the characteure.
tent of the
following kent of the w
s in the recoially the whenditure. (urcott)
repair or mtear, that h
will also be caintain the aunt. (Auck
ther the wothe nature as (PC)).
re of the wdoes not nehere differentageous orreviously, thWhere a de same or e
will result anhere new mlly the whoe cost of thof the choic
mas, Case F
alue, its eapacity, whe
solation to en some casean overall a
d. (PovertyCA))
f the work e, the impoell as the codone, the ghe businessy the expenestern Subu
e asset is t to the ass
kely the exp
he work doer of the wo
e work don
ey points frork done:
onstructionhole of the (Auckland G
maintain thehas the effecapital expasset witho
kland Gas (P
ork done is and the sca
ork done, tecessarily ment materiar performs hat may indecision is mquivalent mnd the cost
materials arole of the ashe work doce of mater
F78)
arning capaether or noestablish thes the courassessmeny Bay Electr
done includrtance of thost of the wreater the s, and the mnditure will urbs Cinema
to the businet then argpenditure w
one are conork done –
ne to the a
rom the an
, replacemasset the c
Gas (PC), A
e asset, ovect of changenditure. E
out changinPC))
capital in nale of the w
the use of nmean that tls are usedor functiondicate a cha
made to usematerials a of the wore used extesset, is recone will be crials. (Auck
city, its useot a goal of he nature ots have tent of whetheric, Highlan
des a consihe work do
work done. importancemore signif be capital.as, Case N8
ness, or theguably the swill be capit
nsidered, a that is, wh
asset
alysis of th
ent or renecost of thatAuckland
ver and aboging the Expenditureng its chara
nature, relework done t
new materithe asset is
d and as a rs better or ange in thee better change in rk done willensively soonstructed,capital kland Gas (
eful life, the work d
of the work nded to useer the charnd Railway,
ideration ofne to the a The greatee of the woficant the c. (Auckland8, Hawkes
e scale al in
ether
he
ewal t
ove
e cter
evant to
als s result e
the l be that ,
(PC),
done, done e acter
f the asset er rk osts d Bay
37
Examples – nature and extent of the work done to the asset
Example 5– taxi driver replaces engine (no change in character or substantial renewal)
Frank is an owner-operator taxi driver. He has driven the same taxi for the past 5 years. Until recently the taxi has been reliable and overall is in good condition. Frank has had his taxi serviced regularly but his mechanic has advised him that the engine is now seriously worn. Frank arranges for his mechanic to replace his taxi’s worn engine with a reconditioned engine that is comparable to the worn one. The cost of the replacement engine and its installation is revenue in nature. This is because the work done does not go beyond repairs to change the character of the taxi. The work done also does not result in a renewal of substantially the whole of the asset (ie, the taxi).
Example 6 – taxi driver upgrades engine (change in character)
Frank decides that if he needs to install a reconditioned engine in his taxi, rather than replacing the worn engine with a comparable engine he would prefer to upgrade to a more powerful one so that he can tow a luggage trailer. The ability to carry additional luggage will expand his business. Therefore, he asks his mechanic about sourcing and installing a compatible but more powerful engine. In this case the cost of the replacement engine and its installation will be capital expenditure. This is because the work done goes beyond repairs and has changed the character of the taxi.
Example 7 – refurbishment of item of industrial plant (substantial replacement and renewal)
Best Processors Limited owns a large item of specialised industrial plant that is central to its business. Due to wear and tear on the plant, and despite regular maintenance, the company is concerned that the quality of its products is declining. To ensure the company preserves its quality standards the company resolves to refurbish the item of plant. Extensive work is undertaken. The plant casing is repaired. The core processor unit is replaced, along with the drive mechanisms, motors and conveyors. Repairs on related parts are also undertaken. As a result of the work done to the plant, improved production quality is achieved. There have been negligible gains in the operating capacity of the plant. The cost of the work done was significant.
The costs incurred by Best Processors Limited will be capital expenditure. Although the plant may not be functionally different after the work, overall, a replacement and renewal of substantially the whole of the plant has occurred. The nature and scale of the work done supports this conclusion.
Example 8 – replacement of rotary platform in a dairy shed (substantial replacement and renewal)
Loamsdown Farms needs to replace the rotary platform in its rotary dairy shed. The existing platform drive mechanism and motor will be retained. The new platform will have no greater capacity than the old platform. The rotary platform, together with its associated drive mechanism and motor, makes up the rotary platform asset. The replacement of the platform will involve the replacement and renewal of substantially the whole of the rotary platform asset. The platform is a significant and distinct part of the entire rotary system in terms of both its size and value. The cost of replacing the rotary platform will be capital expenditure. An increase in the capacity of the platform is not necessary to establish capital expenditure, if the replacement is so significant that it amounts to the replacement or renewal of substantially the whole of the asset.
(This example is based on findings made in the Commissioner’s Interpretation Statement IS0025 “Dairy Farming – Deductibility of certain expenditure” Tax Information Bulletin Vol 12, No 2 (February 2000).)
38
Example 9 – insulation top-up (no change in character or substantial replacement or renewal)
Peter and Alice own a residential rental property in Wellington that was built 30 years ago. After a cold snap, their tenants complain that the insulation in the house has deteriorated and is no longer effective. Peter and Alice arrange for new insulation to be inserted into the house. The cost of the insulation is revenue in nature on the basis that it is a repair to the property and does not change the character of the asset. Nor does it result in a replacement or renewal of substantially the whole of the house. The work done only restores the property to its former condition.
Example 10 – new insulation (improvement that changes character)
Ralph and Bridget own a residential rental property that has never been insulated. Their tenants have been asking for years for the walls and floors to be insulated. Finally, Ralph and Bridget agree and insulation is installed. The cost of this new insulation is capital expenditure. It is not a repair to the rental property. The addition of insulation to the house improves the house and changes its character.
Example 11 – replacement of garage roof using equivalent materials (no change in character or substantial reconstruction, replacement or renewal)
Natalie and Albert own a residential rental property. The rental property has a lean-to garage attached to it which has an asbestos roof. The roof has recently cracked and started leaking. It is no longer appropriate to use asbestos as a roofing material, so the roof of the lean-to is replaced with a comparable pre-painted steel roofing product. The cost of replacing the garage roof is revenue in nature. In this case the work done does not change the character of the asset. This is even though a newer, more modern material was used. The roofing material selected reflects current building practices, was an equivalent product and did not improve the lean-to beyond restoring it to its original condition. Nor did the work result in a reconstruction, replacement or renewal of substantially the whole of the house.
Example 12 – leaky home repairs (no change in character or substantial reconstruction, replacement or renewal)
Cath and Simon own a residential rental property. A few years ago they added a two room extension to the property. The extension has been leaking. The timber framing within the extension is rotten and needs replacing. To make the repairs the cladding and windows need to be removed from the extension and refitted. The cost of the repairs is revenue in nature. The work done to the house does not amount to a reconstruction, replacement or renewal of substantially the whole of the house. Nor do the repairs change the character of the house.
Example 13 – leaky home improvements (change in character)
Cath and Simon are unlucky and have discovered that another of the rental properties they own is a “leaky home”. In this case the solution is not as straightforward as in Example 12 above and the remedial work required is extensive. Cath and Simon decide to re-clad all the house’s exterior walls using a superior concrete block construction system rather than the equivalent substitute cladding system. While the concrete block construction system is more expensive, it should be more durable, and require less maintenance. The cost of repairs will be capital expenditure. The work done goes beyond repairing the house and the character of the house is changed. This is the outcome in this case regardless of whether the work done results in the reconstruction, replacement or renewal of the house or substantially the whole of the house.
Example 14 – major repairs to leaky building (substantial reconstruction)
Stuart owns a stand-alone single-storey commercial building in Onehunga that he leases to a small manufacturing business. The building has been leaking badly and the walls and timber framing are extensively damaged. To rectify the damage and prevent it recurring, extensive work is undertaken. All the exterior wall cladding is removed and replaced with an equivalent recommended product. Large sections of
Othe
176.
Wha
177.
178.
179.
the buildithe floor of the intsignificanis so extebuilding.
Examplesubstant
Andrea oterrace thretaining repaired. expendituwork donwhole of wall.
er conside
Over theto the desome of that canexpenditStatemeprinciple
Wh
Wh
Wh
Is acq
Dores
t if repairs
Where tmay be undertakbasis. Onecessamaintenconveniemaintenmajor ov
Where rresultingoverhauthe issuebecause
The courwhethercapital e
ing’s framingare replaced
terior walls ant. The cost ensive it has
e 15 – repaitial reconst
wns a rentahat has been wall. The re The asset iure on the wne is not extethe retaining
erations fr
e years theeductibility these situa provide asture in thesent will nowes that have
hat if repair
hat happen
hat are not
a deductionquired but
oes the natusult of a sig
are deferre
he work dodeductible.ke repairs aOther businry. Some bance work ent to the bance but frverhaul of a
epairs are dg scale of wl costs are e can arise it occurs ir
rts have cor the deferrexpenditure
g are replaced. New flashare relined. is capital ex resulted in
ir to land imtruction, re
l property. Tn cut into theetaining walin this case i
work done to ensive enougg wall. The
rom the re
courts hav of repairs ations the cssistance wse types of
w consider se been dev
rs are defer
s when the
ional repair
n available dilapidated
ure of the egnificant ev
ed and then
one is the re. The timinand mainteesses may businesses and carry tbusiness. Orom time toan asset.
deferred, thwork done c incurred oc as to whetrregularly,
onsidered isal of repair
e.
39
ed with treathings are insThe cost of
xpenditure. the reconstr
mprovemeneplacement
The house ise hillside. Tl is deteriorais the retain repair the rgh to amoun work done a
epairs and
ve considerand maintecourts have
when decidin situations some of theveloped by t
rred and th
e repair wo
rs?
for expendd asset?
expenditurevent?
n complete
esult of accng of repairenance of th undertake may choosthem out inOther busino time they
hen accumcan be subsccasionally ther the wois capital e
ssues relatirs can resu
ted timber. stalled arounthe work do This is becaruction of su
nt (no chant or renewa
s built on a sThe hillside isating in soming wall (a laretaining want to a reconalso does no
maintena
red many denance expe developedng whetheris deductibese situatiothe courts:
hen comple
rk forms pa
diture incur
e change if
d all at onc
cumulated rs can varyheir busine repairs as se to defer nfrequentlynesses mayy may also
ulated and stantial. Si in additionork done, thexpenditure
ng to the tlt in the cos
Also, damagnd the windone to the buuse the rembstantially t
nge of charaal)
steep slope, s supported e places andand improvell is revenue
nstruction of t change the
ance cases
ifferent situpenditure. Td a numberr repairs anble. This Inons along w
ted all at o
art of one o
rred to repa
damage is
ce?
repairs the . Some buss assets o and when their repaiy at a time ty undertakebe required
completedmilarly, wh
n to regularhrough its se.
iming of rest of those
ged sectionsows, and poruilding is
medial work dthe whole of
acter or
and rests onby a large d needs to bement). Thee in nature. substantialle character o
s
uations relaTo deal witr of principnd maintenanterpretatiowith the
once?
overall proj
air a newly
s repaired a
e expendituusinesses on a regular they becomrs and that is
e regular d to perform
d all at oncehere significr repairs coscale and
epairs and repairs bei
s of rtions
done the
n a
e e The y the of the
ating th les ance
on
ect?
as a
re
r me
m a
e, the cant sts,
ing
180.
181.
182.
183.
184.
Wha
185.
186.
Ounsworcompanyavailablecompanyout dreddredgingexpendityear, or Howevercompanyitself andcompanya new m
Howeverthat dedexpenditand maisaid at 2a contin[and] fo
The Privdeferral being reat 374:
Tthaareca
Sometimhave herevenuePrivy Cowhich thcharacte
The Comthat theyor substexpenditproject tfrom theresult dealways b
t happens
When resuggesteproject fcase whon a gro
In Colonconvert
rth considey to regain e to the comy was respodging for seg the existiture to the even if it hr, in this cay in regainid constructy had effec
means of ac
r, the obiteductibility oture incurrentenance a273 that “thuous demar all”.
y Council’s of repairs s
evenue expe he periodical hey wear out n ordinary inclthough contender the woapital charge
mes repairs ld that this or capital
ouncil’s decihe work waerisation”.
mmissioner y amount tantially theture. Similthat is capite project. Tepending obe a questio
when the r
epair work fed that it isfor tax purpether the p
oup of asset
nial Motor tha building f
ered the ded access to tmpany hadonsible for everal yearsng shipping railway comhad only bease he held ing access ting a deepctively abancess to the
er commentf expenditued regularlyas and whenhe real testnd, as opp
decision inshould not enditure to
renewal by seby use is in nocident of railwtinuous is noork of renewe. [Emphasis
can take a does not din nature. ision in Aucs carried ou
notes howto the recone whole of tarly, if the tal in naturThe cases sn what the on of fact a
repair work
forms part s not approposes wherproject concts.
he Court offrom a war
40
ductibility othe sea. T silted up t keeping ths. Rowlatt g channel wmpany if th
een dredged that the coto the sea
p-water berndoned its oe sea.
ts Rowlatt Jure on repay year by yn required t is betweenosed to an
n Rhodesia change the
o capital exp
ections of the o sense a reco
way administraot and canno
wal when it cs added]
a lengthy pedetermine w Lord Nichockland Gas ut cannot a
ever, that nstruction, the asset, t deferred rere, then thoshow that d particular and degree
forms part
of one oveopriate to sere that projcerns work
f Appeal corehouse to
of costs inche previousthrough neghe channel c J commentwould have he channel d as and wost incurredby dredginth was capold means
J made in Oairs and mayear. Expecan also ben expenditu expenditur
Railways se characterpenditure.
rails and sleeonstruction ofation. The facot be made gcomes to be e
eriod to comwhether theolls comme that “the saffect its na
if the repai replacemethe cost of epairs formose repairs different taxtaxpayer d in the part
t of one ove
rall projecteparate outect is of a done on a
nsidered wan office bu
curred by a s shipping cglect. A locclear but it ted that the been revenhad been dhen seriousd by the shg some of tital expendof access a
Ounsworth intenance inditure incue deductibleure which isre which is
upports ther of those re Lord Macm
pers of a railwf the whole ract that the w
good annualleffected nec
mplete. Age expenditunted at 15,speed or sloature or, he
rs become nt or renewthat work w
m part of on will take thxation outcid and wheticular circu
erall projec
t the courtst the differecapital natu single asse
whether the uilding, inc
ship-buildichannel cal railway had not cae cost of nue dredged yesly requiredhip-buildingthe channe
diture. Theand constru
demonstrais not limiteurred on ree. Rowlatts made to made once
e view thatepairs from
millan state
way line as ilway and is
wear ly does not cessarily a
gain, the coure incurred,708 of the owness witence, its pro
so extensivwal of the awill be capine overall heir characcomes can en. This wiumstances.
ct?
s have ent costs oure. This iset or work
work doneluding seis
ing
arried
ar by d. g el e ucted
ate ed to epairs J meet e
t the m
d
ourts d is h oper
ve asset tal
ter
ll
f the s the done
e to mic
187.
188.
strengthstrengthbuildingrisk and demolishthe remorefurbishexpenditand capistatus ofstrengthalteratiothe prov
The Couoverall pwhetherThis wasthe seismand the capital aallocatiodone. Linvolvedindependeight stoblock. H
Tthinaa cehdth
Ooinacod…$mco
…if [E
The ComaddressipurposeCommisMotor coincurredin naturereconstrasset, or
hening, washening could. The local without thhed. The woval of a mhment and ture incurreital. The Cf the expen
hening. Theons that didviso to s 10
rt of Appeaproject thenr the work ds despite thmic strengt taxpayer hand non-deon of the toLooking at td, Richardsodent unrelaorey warehHis Honour That statutorhere was onen relation to lterations of case it begs tertain specificave constituteifferent catehat was done
On the facts out. It was no
ndependent unnd the other fonverted the eemolition into
…The magnitud5.7 million of
major part of toncrete walls.
…While strengtf anything to tEmphasis add
mmissioner ing whethes of s 108 osioner’s vieontinues to on work ce. Where rruct, renewr to change
s one projecd be consid city counce strengthe
work done imezzanine fl seismic stred into threommission
nditure, wite taxpayer
d not increa8 of the In
al suggesten the work did no morehe fact thatthening andhad alreadyductible. Rtal expendithe total woon J found tated projecouse destin stated at y inquiry rele overall con the particulaf any such asthe question tc parts of the wed alterationsegories of woe.
of this case iot and could nnrelated contrfor new and reeight storey w
o a nine storeyde of the work which the grehe strengthen That was an
thening alone the value, it wed]
recognisesr the work of the Incoew, the prin be relevanarried out arepair work or replace
e its charac
41
ct or whethdered separcil considereening worknvolved thloor, the adrengtheningee categorieer and the th the exce argued it wase the capcome Tax A
ed that if th must be eve than repat the disputd not the exy agreed waRichardson Jiture did noork carried that the wots. It was ned for dem11,366: lates to the wnstruction prar premises sset” so as tto say that thework done in . The allocaork does not
it is essentianot sensibly haractual projecepair work. Iwarehouse-typy office block k involved is reat bulk was ining ($1.28m)n entirely new
or capital andwas their comb
s that the d done was “me Tax Actnciple Richant when conas part of ak is done as an asset, o
cter, the na
her the worrately fromed the build
k the buildine constructddition of ag. The taxes: revenu taxpayer aption of thewas deductital value oAct 1976.
e work undvaluated hoair or alter te only concxpenditure as either reJ stated thaot change t out and thork was nota single pr
molition into
work that waroject, it is t which has too come withe taxpayer cowhich case thtion of the to
t change the
al to consideave been the ts, one for str
It was a singpe structure owith a 50 yeareflected in thn new work () was the con
w structural ad
d repairs alonbined effect th
decision in C“repairs or t 1976. Hoardson J punsidering wa larger pros part of onor substantture of the
rk done on other workding to be ang would hation of new penthousepayer divide, seismic s
agreed on te expendituible being r
of the buildi
dertaken is olistically tothe asset incerned the that the Covenue and at the merehe charactee magnitudt the subjecoject that co a nine sto
as actually dhe total woro constitute in the provisuld have conf
hat limited wootal expendi character of
r the total wsubject of tworengthening thle project whtherwise destr revenue eare total expend$3.47 million)struction of twdition.
e might have hat was so sig
Colonial Mo alterationsowever, in tut forward iwhether expoject is capie overall ptially the w expenditur
the seismick done on tan earthquave been
w concrete we, and geneded the strengthenthe deductiure on seismrepairs anding in term
all part of o determinen question. expenditurommission deductiblee accountiner of the wde of the wct of two converted torey office
done. If rk involved “repairs or so. In such fined itself to rk would iture to f the work
work carried o he building hich tined for rning life. diture of ) and the wo new
added little gnificant.
otor was s” for the the n Colonial
penditure ital or reveroject to
whole of an re on the re
c the ake
walls, eral
ing bility mic d s of
one e re on er
e or ng ork ork
the
nue
epair
189.
190.
191.
192.
193.
work is tis not loo
Colonial needed the boatrequiredto be reprelocatedused mashed. T
The ComMotor, creconstrwork doHis Honomaintenwork by indicatedbut simp
Doogue Colonial layout anot alteroverall cexisted, shed or work domaintentaxpaye
Inorewinwinwexcophcobsou
In the Cundertakto be reqHoweverreplace ochange i
Doogue any of thwork. D
taken fromoked at in
Motor is ofre-piling. Ht-shed to bed to replacepaired. Alsd to a slighaterials thathe building
mmissioner,contended truction of sne was nonour found tance of the himself and this was ply to ensu
J distinguis Motor wasnd refurbisred, and suconstruction and neithesubstantialne was extance that hr to reconsn this case thebjective. Thaepairs resulted
which the Comn the manner work was commndeed be doubwork and expextent of it at tommitted, becroblems whichowever, of tonstruction
boat-shed or hed. Here thf that decisiopgrading be
ommissionken and thoquired. Thr, they weror renew aits characte
J noted thehe work ad
Doogue J th
the characisolation.
ften compaHowever, te substanti
e a substantso, becausehtly higher t were seco
g was the sa
, relying onthat the woubstantiallyn-deductiblethat the taxe piles. Thend with friennot an endere that nec
shed Coloni transforme
shment. Inubstantial pn project toer did a prolly the whoensive, Doohad been dtruct most e taxpayer sot was what hed in other wormissioner refesubmitted formenced otherbtful whether nse that he uthe beginningcause that wah faced him athe kind refeproject resu of a project he taxpayer on, he was fcoming nece
er’s view, Sose repairse repairs w
re not unden asset, or er.
e Commissiditional to en went on
42
cter of the
ared with Shhe re-pilingially damagtial part of e of the chalevel. In caond-hand oame dimen
n Auckland ork done ony the wholee being capxpayer carre course adnds with seeavour to i
cessary mai
ial Motor oed and stre Sherlaw th
parts of the o change thoject to recole of the boogue J attreferred rat of the premught to repaire tried to do. rk being requierred me, thisr the Commissr work became the taxpayer ltimately was . It is true th
as the practicafter he had be
erred to me wulting in the c for the delib chose to repfaced with coessary. [Emp
Sherlaw higs have a flowhen lookedertaken as o substantia
ioner had nthe originan to say tha
overall proj
herlaw. Ing work causged. As a r the damaganges in thearrying out
or salvaged nsions befor
Trotting (Sn the boat-se of the boapital in naturied out notdopted (of decond-handmprove theintenance w
n the grounengthened he boat-she boat-shed he characteonstruct, reoat-shed. Wributed thather than tomises. Door the piles to t The consequired to be dons is not one ovsioner. In thise necessary. would necess involved in if
hat he undertoal way for himeen committewhere there complete recberate impropair the boatonsequentialphasis added]
ghlights a sw-on effectd at in totaone overall ally the who
not sought l re-piling aat if the Co
ject, and th
Sherlaw a sed the rooresult the taged roof thae roof, the t the repairs from the ore and afte
SC and CA) shed in Sheat-shed. Thure. Dooguthing more doing, whe
d and salvage structure was carried
nds that thewith a comed layout a remained
er of the boenew, or reWhile the st to the amo any decisiogue J statethe building. Tences of those
ne. Unlike theverall construs case once thUpon the evid
sarily have inc he had know
ook it all once m to deal with
d. This is no was one oveconstructionovement of tht-shed and, al repair work
situation wht, causing flity, might plan to recole of an as
to categoriand floor wmmissione
he repair w
boat-shedof and floor axpayer waat was una floor was rs the taxpaoriginal boar the work.
and Colonierlaw was aherefore, aue J disagre than neces
erever possged materi of the buil out to it.
e building impletely newand size weunchanged
oat-shed eplace the bscale of theount of ion by the ed at [22]:That was his e necessary e cases to ction project he essential dence it may curred all the
wn of the he was the ot a case, erall
n of the he boat-as a result k and
here repairsfurther repabe extensivconstruct, sset or to
se separatework as capr had subm
work
of as ble
ayer at-.
ial a ll the eed. ssary ible, als) ding
in w re . No
boat-
s are airs ve.
ely ital
mitted
194.
195.
196.
that certmay havdone on reconstrwork coudependin
Both ColBay Powhave onresidentcontendebasis acc
GoddardHawkes convert Goddardoverheato replacundergroof the wexpendit
Hawkes expenditundergrothe expeundergrothe distrat 13,70
Inacreca
Ap
Aat
tain aspectve been a p the boat-s
ruct or reneuld be idenng on the e
lonial Motower. In Hawe overall obial areas wed that eaccording to
d J, basing Bay Powerthose area
d J found thd wires witce the entiround systeork involveture in que
Bay Powerture on woound cable enditure onound replacribution tra07: n the context chieved to daevenue categategory into
As Kitto J said 108:
“...the cdependstotal excannot tscaffolderected,better rorder tototal ex
And as Richardt p 11,366:
“That stthere winvolveconstitwithin taxpayedone in The allodoes no
On the fout. It w
s of the wopoint to theshed was noew, or to chtified as be
effect that t
r and Sherlwkes Bay Pbjective to ith an undech conversithe particu
her reasonr’s own acks to an und
he work donth undergrore overheadm. Goddar
ed in the tostion was c
r, relying onrk done to system int
n the replaccements wansformers
of the total te, it is artifigories, or to capital and
in FC of T v W
capital or incos upon the naxpenditure istake a portioning and, closi, attribute to teason than th
o serve a purppenditure an
dson J said in
tatutory enquiwas one overed in relationute ‘repairs the proviso.
er could have which case th
ocation of the ot change the
facts of this cawas not and co
43
orks carriede submissioot part of ohange its cheing either the work ha
rlaw were coPower the ta replace theerground syon job waslar reason
s on the donowledgemderground sne by Hawkound cablesd system inrd J conclud
otal project capital in na
n Sherlaw, replace theto capital acement of tas treated was capita
project and ticial to disse
o further diss non-capital
Western Subur
me character ture of the pus of a capitan of the work ng your eyes the cost of th
hat the same spose which, if income charg
Colonial Moto
iry relates to trall construcn to the parti or alteration In such a casconfined itselfhat limited wototal expenditcharacter of t
ase it is essenould not sens
d out were on. This sug
one overall haracter, dcapital or rad on the b
onsidered baxpayer coe overheadystem. Has simply carfor the job
ocumentaryment of its lsystem, diskes Bay Pows was done n its urban ded that gi and the moature.
had separae overhead nd non-caphe worn ouas revenuelised. On t
the extent to wect the work sect the “pur items.
rbs Cinemas L
of expenditururpose for whil nature, so done such as to the purposat portion an scaffolding, wit had existede. ”
r Co Ltd v CIR
the work thatction project,icular premisns of any sucse it begs the f to certain sp
ork would havture to differethe work that
ntial to considibly have bee
of a capitalggests thatproject to sifferent asprevenue in boat-shed.
by Goddardntended th system in wkes Bay Prried out on.
y evidence ong standinsagreed. Ower to repla with an ovresidential ven the scaoney expen
ately classif wires with pital items. ut overheade while the this point G
which it has binto capital a
rported” reve
Ltd (1952) 86
re actually incich it was incuis every part the erection ose for which it income natureould have bee
d, would have
R (1994) 16 N
was actually , it is the totses which hach asset’ so a question to specific parts ofe constituted
ent categories was done.
er the total wn the subject
l nature thet as the wosubstantialpects of thenature
d J in Hawkat it did no its urban Power n an ad hoc
before her ng policy to
On that evidace its
verall objec areas withale and degnded on it,
fied an For examd wires withexpenditur
Goddard J h
been and enue
CLR 102 at
curred urred. If a t of it; you of a t was in fact re for no en erected in made the
NZTC 11,361
done. If tal work as to as to come
say that the f the work alterations. of work
work carried of two
ere rk ly
e
kes ot
c
and o dence
ctive h an gree the
ple h re on eld
197.
198.
199.
200.
201.
Tsoaisthrein
Hawkes project ocharactework forbecausesame ob
Goddardall expenoverheaexpenditGoddardits own f
Goddardproject isystem bservicedHer Hon
Apyesetho1inumu
This suggroup ofthose asrepair w
Case X2incurredMotor, aa buildinthe genedecision
Inbbea
indepenbuildingwhich codestinedrevenue
he case of Shought to rely nd non-capitassues of both here was noteconstructiondicate that
Bay Powerof capital wer of that ovrming part work done
bjective from
d J in Hawknditure on d lines as bture was nod J found thfacts as to
d J noted thn terms of but rather by a distriour observ
Alternatively, eroject’ but in ear basis in reerviced by a dhose jobs werld Board in 19987. On this
ndividual convnderground w
motivated Hawnderground in
ggests that f assets, thssets is take
work is not l
6 considere as part of
and Judge Bng were caperal capital/, and foundn Colonial Motusiness point uilding with aarning capacit
ndent unrelate and the otheonverted the d for demolitioe earning life.
erlaw v CIR (as authority f
al items falls inscale and degt one overall
on or that the it was of a c
r makes it cwork, then tverall projeof that proje in every pm both a p
kes Bay Powrepairing obeing revenot part of thhat the natuthe extent
hat even if t the converin terms ofbution traned at 13,70
even if the "finterms of the iespect of indivdistribution trae undertaken 969 and contin basis all haveversion projectwould constituwkes Bay Powenstallation.
where there nature ofen from theooked at in
ed the dedu one overalBarber founpital costs. /revenue pd at [39] thtor Co Ltd v C of view, the t potentially vety into a soun
44
ed contractualer for new andeight storey won into a nine ”
1994) 16 NZTfor separate cnto a differentgree. On the fl constructioe expenditurcapital natur
clear that wthat work wect. In sucject into capart of thatractical and
wer also obor replacingnue in natuhe overall pure of this e and scale o
the overall rsion of thef the individnsformer, h00: nal objective" individual convidual streets ansformer, th pursuant to tnued by Hawke resulted in tt completed ate a new asseer to effect ea
re is one ovf the expene charactern isolation.
uctibility ofll project. nd that cost In reachin
principles, tohat: C of IR, as in ttotal work undery limited or,
nd building cap
projects, oned repair work. warehouse-typ storey office
TC 11,290 on lassification ot category to facts in Sheron project rere was so dise. [Emphasis
where work will take its h a case, it
apital or rev project is d business
served that existing ovre. Goddaplan to put expenditureof the work
plan was ne entire urbdual converher finding w
were not to bversion jobs u containing grat would not athe one "firm kes Bay Powerhe creation of
and each indivet, whatever tach conversion
verall capitanditure on ar of that on
f earthquakIt followed ts incurred ng that decogether wit
he present cadertaken was , possibly, nonpable of being
e for strengthe It was a singpe structure o block with a 5
which Hawkesf expenditure the present carlaw Dooguesulting in a c
sproportionas added]
forms part character ft is artificiavenue categcalculated tpoint of vie
t the taxpaverhead linrd J accept in undergre had to bek done.
not viewed ban residentrsion of indwould not h
be viewed as aundertaken onroups of consualter the pictupolicy" institur after incorpof a new asset.vidual distributhe particular n project and
al project inany repair we overall pr
ke-strength the decisio to earthquision Judgeth the Colo
se, from a prato transform an-existent revg used to earn
ening the le project
otherwise 50 year
s Bay Power into capital ase on the
e J found complete
ate as to
t of one ovefrom the l to dissectgories. Thito achieve ew.
ayer had trenes with newted that thisround cablee determine
as a total tial distribuividual strehave chang
a ‘total n a year by umers ure. All of uted by the oration in . Each tor installed reason that each
nvolving a work done roject, and
ening costson in Colonuake-strenge Barber aponial Motor
actical and an unsound
venue-n income.
erall
t the is is the
eated w s es. ed on
ution eets ged.
on the
s ial
gthen pplied
202.
203.
204.
205.
206.
207.
Judge Badone as to issuesdistingui
Judge Baextensiv[43]:
OinweaWcoinco[E
In the Coverall p
Howevermay be taxpayeoverall pthat projConsequor substexpendit
To deternecessaview. Foexpenditdone is acan be idwork forto reconasset or appropriits naturCase X2
In the Cacknowlcosts ansituationBlancharalternatirecognisdeductio15,008:
Inptonth
arber found a conseques arising whished the d
arber notedve than that
Of course, in thn Colonial Motwork undertakearthquake cod
While the workompliant, it enncome-earningoncept of capEmphasis in o
ommissionproject shou
r, the Comappropriater may do wproject. If ject the na
uently, if thantially theture on tha
rmine if appry to considor exampleture betweea repair, budentified (Srms part of struct, rep to change iate and allre from the6).
ourt of Appedged thatd non-dedu
ns, but thatrd J made tive submissse the impron for the b n particular sitossible and apo work which ature has beehis is not such
d at [43] thence of a shen undertdecision in S
d that, whilt done in C
he present castor Co Ltd v CIen to improvede compliant ak in this case wnsured the cog structure of ital. The procriginal]
er’s view, euld take its
missioner ae. For exam
work on an it can be deture of the at work do
e whole of aat work is li
portionmender the wore, in the Coen capital aut at the saSherlaw). I one overallace or rene the asset’s the expen overall pro
peal’s decis an apportiuctible capit apportionmthis acknowsion that haovements i
balance of t
tuations an apppropriate — is truly a repa
en done. It is h a case.
45
hat the eartsingle plan, aking otheSherlaw.
le the workColonial Mot
se the work uCIR, but the sae the building’and thus avoiwas to make tntinued availa
f the taxpayercess of earnin
expenditures character
agrees thatmple, as wasset whileemonstrate work must
oes not recoan asset orkely to be
nt is approprk done frommissioneand revenuame time soIn contrastll project, wew the asss characterditure incuoject (Colon
sion in Poveionment of ital costs isment was nwledgemenaving capitin the workthe expend
pportionment where a part air and at the often possibl
thquake-st rather thar work. On
k done in Cator, it was o
ndertaken waame result mu’s earning-capding the sterithe building eability of the a’s partnershipg income is re
e on repairs from that p
t in some sias the casee at the samed that the t be determonstruct, rer change itsrevenue in
priate in anm a practicr’s view, ape will be apome upgrad, where repwhere the oet or subst, then apporred as parnial Motor,
erty Bay Ele costs betws possible anot approprt in responalised a po
k done it waiture. Blan
of an amountof the money same time soe to distinguis
rengtheningn as an ad n this basis,
ase X26 waof the same
as not as exteust follow. Thepacity by makilisation of thearthquake-codasset as part op. That structevenue in con
s forming pproject.
ituations ape in Hawkesme time un work done
mined on itsenew or reps character nature and
y particularcal and buspportionmeppropriate wding of a capairs and mobjective ofantially theortionment rt of that pr Hawkes Ba
ectric Blancween deducnd approprriate in evese to the tartion of theas then entchard J com
t of expenditu spent has be
ome upgradingsh which is wh
g work was hoc respon, he
as less e character
nsive as that ere was ing it
e asset. de of the ture is a cept.
part of one
pportionmes Bay Powedertaking a
e is not parts own factsplace an ass the d deductible
r situation,siness pointent of where the apital natur
maintenancef that projee whole of t will not beroject will tay Power a
chard J alsoctible repairriate in somery case. axpayer’s e expenditutitled to clammented a
ure is een applied g of a capital hich. But
s nse
r. At
ent er, a an t of s. set
e.
it is t of
work re e
ect is the e take nd
o r me
ure to im a
at
208.
Wha
209.
210.
211.
Is a dilap
212.
213.
BlancharCinema,created,Honour cbasis tha
t are notion
Where ccan be cwork be
As statediscusse15,008:
InsatroNthanS
…
T(1
Wpcap[E
Where adeductiorepairs.
deduction apidated asse
Where easset hathe capit
Law Shiprecently a ship inwhile in to the vadeductibdecision
rd J, relying found on t no repair wconcluded tat none of t
nal repairs?
capital expeclaimed for en carried
d above Blaed the decis n Auckland Traid that no parack was, in f it as notion
North P and Tuhe reasons of nd Gas Co (19
Suburbs Cinem
... whenexpendiother inand for his incoway. Seincurrednot.
…
o similar effec1994) 16 NZT
We agree thapayment whicannot be a d
part of it migEmphasis add
a taxpayer con cannot b A taxpaye
available foet?
expenditureas been acqtal cost of a
pping addre acquired a
n a poor sta the poor stalue of £51ble but was was follow
g on Aucklathe facts ofwork had inthat the taxthe work d
?
enditure is i an amountout differen
anchard J msion of the
rotting Club (Inart of the mo fact, spent onally spent ourner J expres Finlay J in Ma935) 19 TC 48
mas Ltd (1952
n a taxpayer hture which wivolving an exhis own reasome tax assessection 53 is cod, not with exp
ct is the judgmTC 11,361.
at it is not poch has not a
dissection of ht otherwiseed]
could have be claimed fer cannot de
or expendit
e is incurredquired, thatacquiring th
essed the sasset. Law ate of repaitate of repa
1,558. The part of the
wed in Colle
46
and Trottingf the case tn fact beenxpayer wasone by the
incurred tht that mighntly.
made this cCourt of Ap
Inc) v C of IR oney spent oon repairs anon repairs whssed their agreargrett (HM In81 at pp 488–) 86 CLR 102
has two courseill be an allowxpenditure whons he choosesed as if he haoncerned withpenditure whi
ment of this C
ossible to clactually been what is spee have been
done the wfor a notioneduct expe
ture incurre
d on repairst expendituhe asset.
special situa Shipping cr for £97,0air for one court helde capital coector of Inla
g (CA) andthat, as a nn carried ous not entitle taxpayer c
e courts haht have bee
clear in Povppeal in Au
[1968] NZLR on constructind it was nothen that is neement (p 977nspector of Ta–489 and of Ki at pp 107–10
es open to himable deductioich will not be
es the second ad exercised hh expenditure ich could have
Court in Coloni
aim as expenn expended fnt upon a ca laid out on r
work differenal amountnditure for
ed to repair
s and mainre is likely
ation of dedconcerned a000. The covoyage and that the co
ost of acquiand Revenu
Western Sew asset h
ut by the taed to a dedconsisted of
ave held than spent on
verty Bay Elckland Trot
967 at p 980 ing the new t possible toot what hap7). The Courtxes) v Lowestitto J in FC of 09. At p 107 K
m, one involvin for income t
e an allowable course, he cahis choice in t which was in e been incurre
ial Motor Co L
nditure on a ror that purp
apital work brepairs, but w
ently but cht of expend work they
r a newly ac
tenance soto be cons
ductions foa company ompany used then carrost of the rring the shue, Cook Isl
Suburbs had been xpayer. H
duction on tf repairs.
at no dedu repairs ha
Electric whetting. At
Richmond J trotting
o treat part ppened. t adopted toft Water
f T v Western Kitto J said:
ing an tax and the
e deduction, annot have the opposite fact ed but was
Ltd v C of IR
repair a pose. There because was not.
hose not toiture on have not d
cquired but
oon after anidered part
or repairs to that purched the vess
ried out reprepairs wasip. That lands v AB
is the
ction d the
re he
, a
done.
t
n t of
o a ased sel pairs not
214.
215.
216.
217.
Donald Lrepairs t
The courCommonW Thombe done use in thbuilding the buildacquisiti
WindeyeEreMwrewitoa
It is welacquiredintendedcost of t
The limitAssociatdeferreddeductibdown monumber years. S296:
TS
(1thbo
Inafacac
(2tiataac
(3pchhwdw
Ltd [1965] to a recentl
rt in W Thonwealth of A
mas the taxp to it, somehe company to make itding ready on cost of
er J observexpenditure upepairs are for
Maintenance inwear and tear epair defects a
when a thing t is not in gof putting it icquisition, n
l settled byd asset so td by a taxpthat asset.
ts of the prted Theatred repairs to ble. In thatovie theatr of years. TSalmon LJ d
here seem to Shipping] and
1) In the Law he purchase peen in a fit stapportunity. …
n the present ffected by thecquisition. Thecquisition sinc
2) In the Law me of purchat the date of ilthough no mocquisition.
3) In the Law rinciples of soharged by theowever, the c
with the establisputed items
with any statut
NZLR 679 ly acquired
omas & Co P Australia (1payer compe of which wy’s busines suitable foto be used that asset,
ed at 72: pon repairs is the maintenanvolves the pein operation. arising from t is bought food order andn order suita
not a cost of
y the courtsthat it is in ayer is a ca
rinciple in Les. The Eng a movie tht case the tre in 1945. The taxpaydistinguishe
me to be manthe present ca
Shipping Co. price was subsate of repair … .
case, the pure fact that thee sellers couldce no licence t
Shipping casese…. In the prts acquisition oney was spe
Shipping caseound commerce taxpayer as commissionersished principl to revenue ete.
47
(SC), whic ship.
Pty Ltd v C1965) 115 pany acquirwas necesss. Windeye
or use were by the tax so was a c
properly attriance of an incoeriodic repair o It is an expehe operations
or use as a cad suitable foable for use its maintena
s that expe good orderapital cost
Law Shippinglish Court heatre acqutaxpayer ac The theatyer repaireded Law Ship
ny important ase.
Ltd. v. Inlandstantially less … and that the
rchase price pe cinema was d not lawfully to execute su
e the vessel wresent case, t in spite of itsnt on deferred
e there was ncial accountingrevenue expes held, on ames of sound cxpenditure, a
h also addr
Commission CLR 58 endred a buildisary to maker J held th
e not deducxpayer comcapital cost
buted to reveome-producinof defects thanse of a reven
s of the personapital asset
or use in the is part of theance. [Empha
nditure incr and suitaband forms
ng are dem of Appeal fuired in a dcquired a fure had not d the theatripping on th
distinctions b
d Revenue Com than it would ey made good
aid by the taxin disrepair at have executech work was t
was not in a stthe cinema was state of disred repairs for a
o evidence thg the £39,558enditure. …. Inple evidence, ommercial acnd these princ
ressed the d
er of Taxatdorsed AB Dng that reqke the buildhat the repactible. The pany forme.
nue account wg capital asset are the resunue nature whn who incurs iin the buyerway intendee cost of its asis added]
urred to reble for use part of the
onstrated ifound that ilapidated cully operatiobeen repaire graduallyhe following
etween that c
mmissioners, have been had this defect a
xpayers was int the date of ited the repairs then obtainab
tate to pass suas a profit-earepair. It remaa number of y
at on establis8 could propern the present that it was incounting to chciples in no w
deductibilit
tion of the Donald Ltdquired workding suitablairs done to cost of geted part of t
when the et. ult of normal hen it is to it. But if r's business ed, the cost
pair a new in the way acquisition
in Odeon expenditurcondition wonal but rured for a y over seveg grounds a
case [Law
12 T.C. 621 ad the vessel at the first
n no way ts prior to the
ble.
urvey at the rning asset ained so, years after its
shed rly be case, n accordance harge the
way conflict
ty of
d. In k to le for o the tting the
ly n
re on was un
en at
218.
Doessigni
219.
220.
221.
222.
223.
224.
Even thostate, thpurchaseaccount similar ctheatre w
s the natureificant even
The Comchange isuch as considerexpenditexpenditbe dedubecausethat the caused t
This is dextensivbuilding taxpayelessees a
The fire pizza pathe shopreplacedplastereand substhe buildthe iron flats wer
The buildrepairs twas befowhich haThe dowimproverepairs tdisallowe
Judge Bawork ratundertakthe replaasset thaaccept tbasic buconcludebuilding
The Fedeof repairR 2001 F
ough the exhe expendite price paid of the condcondition duwas immed
e of the expnt?
mmissioner if the damaan earthqu
red in this sture incurreture. If thectible; if it the deduc work has othe damage
demonstratevely damag as two shors leased thas resident
significantlrlour also s
ps back intod, while in td. Both shstantial pluding was gu roofing desre left gutte
der who unthe overall ore the firead recently
wnstairs shoment. Thethat the insed the ded
arber identther than thken was soacement, reat went beyhe buildingilding struced that as t but to rebu
eral Court ors and mainFCA 160, [2
xpenditure ture was stid by the taxdition of thue to restridiately prof
penditure c
considers tage to be reuake, a fire statement ned on repaie repair wois on capitatibility of thon the assee to the ass
ed in Case ed by fire. ops (a pizzahe upstairs tial flats.
ly damagedsuffered coo working cthe pizza paops were rmbing repautted. The stroyed by ed.
ndertook thstructure w. This was been refur
ops were ree taxpayerssurance payuction on t
tified the buhe individua extensive econstructiyond the no was not to
cture remaithe expenduild it, it wa
of Appeal ontenance ex2001] 3 CT
48
was to repill found to xpayer hade theatre, actions impofitable, desp
change if da
that the naepaired occ or a stormneed to be irs and mai
ork is on reval account,he repair coet, rather thset.
F67 where The taxpaa parlour an part of the
d the wall linsiderable condition tharlour someredecoratedairs were u roof struct fire were a
he work stawas probabs mainly berbished befestored to ts claimed a yment did nhe basis it
uilding as tal shops. H in relation on or renewormal concotally destrined intact iture by thas capital a
of Canada hxpenditure
TC 109). In
pair an asse be deducti
d not been das all theatosed by thepite its run
amage is re
ature of thecurs as a re
m. Consequ addressed intenance ivenue acco it will not osts is detehan when t
the taxpayayers leasednd a knick-e building t
inings of thwater and
he lining of e of the lind. The elecndertaken.ture was realso replace
ted that at ly in a far wcause the ufore the firetheir pre-fir deduction not cover. was capita
he asset thHe found th to the builwal of a sucept of reparoyed and a after the fie taxpayersand not ded
has also con after a sign Bowland t
et acquired ible. Signifdiscounted tres at that e war. Furt-down cond
epaired as a
expendituesult of a siuently, the s to determis capital orunt, the exbe deductib
ermined mothe work wa
yers’ buildind the lower-knack shopo the respe
he knick-knsmoke dam the knick-king was clectrical wirin The upstaplaced and
ed. Howeve
the concluworse condupstairs flate, had beenre conditionfor the por The Comml expenditu
hat was the he building ding that itbstantial paair. Judge Ba major porre. Howevs was not tductible.
nsidered thnificant evethe taxpaye
in a dilapidficantly, the to take t time werether, the dition.
a result of
re does notgnificant evsame issueine whether revenue xpenditure ble. This isore by the eas done or
ng was r floor of thp). The ective shop
ack shop. mage. To bknack shopeaned and rg was replaairs portiond the parts er, the ups
sion of thedition than ts, the largn left guttedn with no rtion of the missioner ure.
e subject of work t amountedart of a capBarber did rtion of thever, he to repair th
he deductibent (Bowlaner’s rental
dated e
in a
a
t vent es as r any
will s effect what
e
p
The bring p was re-aced n of of tairs
it
ger of d.
the
d to pital
e
ility nd v
225.
226.
Sign
227.
228.
229.
property$80,000that afteconcludevirtually concludenature.
In both the workdeterminmaking what cau
In the Ccaused breconstrwhole ofwill be cbe done comes acosts, wquestion
ificant even
As founddeterminhas on tnot in itsdeductib
The Can2010 DTout. In damagedlifted theway. Dacaused mrushed usidewallsno longeand damhouse’s than thisundertak
The taxprelated tfoundatithem wijoists analso repplumbinwas replpatched,reused iclad the
y was dama0 of which $er the fire hed the reno rebuilt anded the cost
Case F67 ak undertakening whethits decisionused the da
ommissionby a significruction, repf the asset,apital in na to an asse
about as a chile extens
n of fact an
nts and dila
d in Case F6ned by the the asset. Tself changeble.
adian Tax CTC 1300. IOctober 20d the propee house offampness ovmuch of theunderneaths sitting in er used. Thmage. Eighwindows as, and painken other w
payer paid to the floorons. The wth more ce
nd, where nlaced. Oncg and electlaced. The, and half tn the gable bottom of
aged by fire$5,000 washe spent $6ovations wed resulted i of the wor
and Bowlanen and the er the expe
n neither coamage to th
er’s view, wcant event,
placement o, or the chaature. Howet as a resuconsequencsive, may bd degree.
apidated as
67 and Bow nature andThe deferrae the charac
Court demon Martinello004 a substerty, makinf its foundaver the yeae rest of th the house mud. The he propertyt years befnd doors anting and cle
work on the
to have the that was dwork includment, rem
necessary, nce the houstrical supply fallen chimthe roof wae ends of th the house.
49
e. Before ts attributab66,472 on rere so extenn a new ca
rk was not d
d the court effect thatenditure waourt focusedhe asset.
where the w, and the wor renewal aracter of thwever, wherult of a signce of the nebe deductib
ssets
wland, the dd scale of thal of repairscter of whe
onstrated to the taxpatantial hurrng it uninhation causin
ars had weae floor to f
e leaving m storm alsoy had also sfore the stond updatedeaning betwe house.
e house repdamaged wed straightoving silt anew floor bse was backy had to be
mney was rs re-shingl
he house an. The insid
the fire the le to the larepairing thnsive in natapital assetdeductible
ts looked att work had as on capitad on when
work done work done rof the assehe asset is re some neificant evenecessary rele (Sherlaw
deductibilithe work uns, before a ether expen
this in Martiayer ownedricane-strenabitable for g the main
akened the all in. In auch of the
o blew downsuffered soorm, the taxd the plumbween tenan
paired. Muwhen the hotening the fand debris, boards. Thek on its foue reconnectremoved, thed. The olnd a new ve of the ho
building wand. The ta
he propertyture that th. Consequebecause it
t the natureon the asseal or reventhe work w
is to repairesults in th
et, or substa changed, tcessary repnt and furthepairs, thenw). This wil
y of repair dertaken a significant nditure on r
inello v R 2 a house th
ngth storm a time. Th wooden be sills and joddition, thefloor and pn an old chme tenant xpayer hadbing and wints, the tax
ch of the eouse was liffootings anand puttinge footing ofndations thted. The hohe roof andd aluminiuminyl siding use was re
as valued aaxpayer clay. The courhe house wently, the c was capita
e and scaleet when ue account
was done or
r damage he antially thethe expendpair work mher repair wn the repairll always be
costs is and the effe event, shorepairs is
2010 TCC 4hat she ren significanthe winds haeam to givoists, whiche storm wa
parts of the imney that wear and td replaced tiring. Othexpayer had
expenditurefted up off nd reinforcing in new sif the walls he existing ouse’s wirin
d walls werem siding wwas used t
epainted wh
at imed rt
was court l in
e of
t. In r
e iture
must work r e a
ect it ould
432, nted ly ad e h aters t was tear the er not
e its ng lls, was ng e as to here
230.
231.
Key main
232.
needed. footwea
The houthat all tnormal wdamage beyond repairs adeductib
The Comwhile thewas largwear anThereforrequiredrepairs tImplicit the taxpsubstant
points relntenance
The Comto other
Thexcomcap
Ththeon
Threlna
Whrecwhpronapa
RerecassproonCIR
Whbaits (Sh
A small, ar) at the ba
se was repthe damagewear or tea while it waits original and mainteble as curre
mmissioner e work the
gely as a red tear, andre, while thd repairing, that had acin this is th
payer did notially the w
lating to ocases
mmissioner considerat
e timing ofpenditure impleted aspital expen
e deductibie work carr when the
e speed or evant to deture (Auckl
here deferrconstructiohole of the oject that isture. This rticular circ
epairs and mconstruct, rset or to choject. This a single asR (CA), Ha
here repairssis and not character herlaw).
attached woack entranc
aired to itse that had ar, depreciaas rented o condition inance, alth
ent expense
considers t taxpayer usult of defe
d depreciatie significan the nature
ccumulated hat the couot reconstruhole of the
other cons
takes the ftions from t
f repairs is ncurred is
s and when diture (Oun
ility of reparied out andwork is car
slowness weciding wheland Gas (P
ed repairs n, replacemasset or whs capital in will alwayscumstances
maintenancreplace or rhange that is regardlesset or worwkes Bay P
s and maint as part of from the ef
50
ooden mudce and mod
s original reoccurred w
ation over tout. The ren any man
hough all does and were
that the coundertook werred repairon (eg, thent event (the of the wor over the prt in Martinuct, replace
e house or,
siderations
following kethe repairs
not a criticdeductible required wnsworth).
air costs is d the effectrried out (R
with which ether the ePC)).
become soment or renhere deferr nature thes be a quess (Auckland
ce work tharenew an aasset’s cha
ess of whetrk on a grouPower, Case
ntenance ex one overaffect that th
d room (for dest woode
entable conwas the resuthe time it wpairs did noner. Thereone at oncee not requi
urt reachedwas extensrs – from tee weakenedhe storm) drk undertak
period that nello conside or renew change its
s from the
ey points fr and maint
al factor w – repairs cwithout nece
determinedt that it has
Rhodesia Ra
the work isxpenditure
extensive newal of thered repairs en those restion of factd Gas (PC))
at forms passet or sub
aracter will ther that prup of assete X26).
xpenditure ll plan, the he work do
removal ofn deck had
dition. Theult of tenanwas rentedot improve efore, the ce, were prored to be c
d this conclive, the stoenant damad floor joistdid create dken after ththe house wered the w the house, character.
e repairs a
rom the anenance cas
hen decidinan be defeessarily giv
d more by ts on the asailways).
s done is no is capital o
that they ae asset or sform part opairs will bet and degre).
rt of one ovbstantially ttake its na
roject conces (Colonial
is incurred expenditur
one has on t
f outdoor d to be repla
e court founnt damage, d out, or sto the house
costs of theoperly capitalised.
lusion becaorm damagage, normats and sills)damage thahe storm wwas tenant
work done b, or
and
alysis relatses:
ng whetherrred and
ving rise to
the nature set, rather
ot usually or revenue
amount to tsubstantiallof one overe capital in
ee in the
verall projethe whole oature from terns work d Motor Co L
on an ad hre should tathe asset
aced.
nd orm
ause, e
al .
at as ted. by
ting
the
of than
in
the y the
rall
ect to of an that done Ltd v
hoc ake
Exam
It amde
Norepdo
Exgoa cSh
Deexwawa(O
WhdeanassF6
If abeexunthatha
mples – ot
Example
Phil ownsto the proopportunhas to incextensiveto open athe floorscracked oreplace, rThe workcosts incuto accum
Exampleproject t
Lot Develbuilding iearthquarequirembenefit frthe floor building. one overafor the co
is appropriamount of exductible ca
o deductionpairs. A taxne (Wester
penditure iod order ancapital costhipping, W T
epending onpenditure o
as not affecas acquireddeon Assoc
here an assductibility od scale of tset and not7, Bowland
an asset dafore the evpenditure cdertaken aat, althoughat work cou
ther consi
e 16 – repai
s a rental prooperty but thity to restorcur significane cleaning, reand shut smos, replacing tone, and havreconstruct ok done also durred by Phiulate and ar
e 17 – projeto change c
lopments Lims looking shke-strengtheents for that
rom a complplan and en All the expeall project toost of any re
ate and posxpenditure bpital works
s are availaxpayer canrn Suburbs,
ncurred to nd suitable and formsThomas).
n the circumon repairs tcted by the , it could beciated Thea
set is damaof expenditthe work unt on the occd).
amaged as vent, the decontinues tond the effeh extensiveuld still be c
derations
irs to renta
operty. A lohe tenants he the propernt expendituepainting, eaoothly) and the kitchen bving a plumbor renew thedoes not chal are significre revenue in
ect to refurcharacter)
mited has owabby and thening work nt type of buiete refurbishhance the coenditure incuo change theepairs that ar
51
ssible in sobetween des (Poverty B
able for a nnnot deduct, Auckland
repair a ne for use in
s part of the
mstances, ato a newly asset’s stae used as i
atres).
aged as a reture to repandertaken acasion that
a result of eductibility o depend oect that wore work is unconsidered
from the
al property
ong period hahave recentlyrty to a goodure on the prasing windowreplacing crabench top, fber check ane property oange the chacant, they arn nature.
rbish and st
wned an oldehe company needs to be lding. The chment, incluommon areaurred will bee character ore included w
ome situatioeductible reBay Electric
notional amt expenditu Trotting (C
ewly acquirthe way inte acquisitio
a deductionacquired as
ate of disrepntended de
esult of a sair the asseand the efft caused the
a significan of repairs aon the naturk has on tndertaken a to be reve
repairs an
(deferred r
as passed siy vacated and condition broperty. Thews (ie, repaiacked panesitting a new
nd repair all tr substantiaracter of the
rose from rep
trengthen b
er commercihas recentlydone if it is company decding structu
as as well ase capital expof the buildinwithin the pr
ons to appoepair costs c).
mount of expre for work
CA), Poverty
red asset sotended by tn cost of th
n may still bsset if the ppair and, wespite its st
ignificant eet depends ect that woe work to b
nt event waand maintere and scalhe asset. Tall at once,nue in natu
nd mainte
repairs don
nce repairs wnd Phil is takbefore lettinge work done iring windows, sanding an hand basin the taps. Phlly the wholee property. pairs that ha
building (on
al building fy been informto comply wcides the bural changes earthquakeenditure as ng. No deduroject.
ortion an and non-
penditure fk they havety Bay Elect
o that it is the taxpayhat asset (L
be allowed purchase p
when the astate of disre
event, the on the natork has on be done (Ca
as dilapidatenance le of the woThis may m, the cost oure (Martin
enance cas
ne all at onc
were last making the g it again. He includes ws to enable nd re-varnis to replace ahil does not e of the propAlthough th
ad been allow
ne overall
for 10 years.med that with council uilding would that will ext
e-strengthenit forms part
uction is allow
for e not tric).
in er is Law
for rice
sset epair
ure the ase
ted
ork mean of ello).
ses
ce)
ade
He
them hing
a
perty. e wed
. The
d tend the t of wed
52
Example 18 – repair to building that led to more repairs (repair; no overall project of substantial reconstruction, replacement or renewal or change in character)
As a result of ground subsidence, Northern Roasters Limited set about repairing the uneven floor of the small factory premises that it owns. This involved minor foundation work. As a result of the foundation work, several windows and walls cracked. These had to be repaired, and the walls then had to be re-plastered and painted. Although the work done to the factory was costly, the repairs were completed on an ad hoc basis. The work done was not done as part of one overall plan to reconstruct, replace or renew the premises, or substantially the whole of the premises, or to change the character of the premises. Further, the actual scale and nature of the work done did not have this effect. Therefore, the repair costs are revenue in nature.
Example 19 – double glazing (one overall project to change character with no apportionment available)
Erica has a restaurant in an old villa that she owns. The villa is used exclusively for the restaurant. The villa is located near a very busy thoroughfare. To keep noise levels down inside the restaurant Erica has decided to install double glazing. While installing the double glazing the builder discovers that two window frames on the south side of the villa are rotten. The windows are repaired to enable the installation of the double glazing. Erica’s objective in this case was to install double glazing in her villa. The work done has changed the character of the villa. The work done to repair the windows formed part of Erica’s objective to double glaze the villa and therefore is part of one overall project to change its character. Consequently, all the expenditure incurred by Erica is capital in nature.
Example 20 – house painting and extension (one overall project to change character along with maintenance work where apportionment is available)
George owns a rental property. George decides that by adding on two new bedrooms and another bathroom to the property he will be able to get a much higher rental. George employs a builder to build the new extension. George also thinks the property is looking tired and needs a new coat of paint so he employs a painter to paint the property. The painter also paints the new extension. George’s objective in this case was to add on the two bedroom extension. The work done to extend the house changed the character of the property and so is of a capital nature. The painting of the new extension is part of George’s project to change the character of his rental property and is also capital in nature. However, George can establish from a practical and business point of view that re-painting the remainder of the house was not part of his project to change the character of his property. Re-painting the remainder of the house is maintenance work. Therefore, George can treat the portion of the painting expenditure that relates to painting the house but not the extension as being revenue in nature.
Example 21 – newly acquired but damaged rental property (part of capital cost)
Anne and Jane bought a property at a discounted rate because of earthquake damage. The roof of the property has partially collapsed and a corner of the house has been damaged. Anne and Jane want to rent the property out, so spend money fixing the roof and the damaged part of the house to put it in a tenantable state. The expenditure on the repairs is capital in nature. Anne and Jane’s costs in getting the property to a tenantable state are treated as part of the property’s acquisition cost.
Example 22 – damaged and dilapidated commercial building (repairs; not substantial reconstruction, replacement or renewal or change in character)
David and Angus own a commercial building that was superficially damaged in an earthquake. David and Angus have owned the property for a long time. When David and Angus purchased the property it was in excellent condition. Over time it has become dilapidated, so when the earthquake occurred the poor state of the roof led
53
to more repairs then being necessary. The tenants are unhappy and request that the building be fixed. David and Angus spend money on the building: inside the building the interior walls are re-plastered and repainted and the stairwells are repaired; outside the building the roof is repaired, cracked and broken windows are replaced, and the exterior walls are repainted. The work done brings the building back to the standard it was when David and Angus bought it. The work done does not reconstruct, replace or renew the building or substantially the whole of the building. The work also does not change the building’s character. The expenditure undertaken by David and Angus is for accumulated repairs and is revenue in nature.
Example 23 –reconstruction of damaged rental property (substantial reconstruction, replacement and renewal)
Jennifer and Peter own a residential rental property that was significantly damaged in an earthquake. Before the earthquake the property was in a good state of repair. After the earthquake, to get the property in a tenantable state, Jennifer and Peter replace the property’s severely damaged foundations, reconstruct the floors, rebuild three of the property’s collapsed external walls and replace the badly damaged roof. Jennifer and Peter also demolish the property’s partially collapsed chimney, which is a hazard. In this case, the cost of the work Jennifer and Peter have done is capital expenditure and not deductible. Where work is so extensive that it results in the reconstruction, replacement or renewal of the asset, or substantially the whole of the asset, the cost of that work will be capital expenditure.
54
References
Subject references Capital/revenue Deductions Income tax Repairs and maintenance Legislative references Income Tax Act 2007, ss DA 1 and DA 2 Income Tax Act 1976, s 108 Related rulings/statements IS0025 “Dairy Farming – Deductibility of certain expenditure” Tax Information Bulletin Vol 12, No 2 (February 2000) IS10/01 “Residential rental properties – Depreciation of items of depreciable property” Tax Information Bulletin Vol 22, No 4 (May 2010) Case references Auckland Gas Co Ltd v CIR (1997) 18 NZTC
13,408 (HC); (1999) 19 NZTC 15,011 (CA); (2000) 19 NZTC 15,702 (PC)
Auckland Trotting Club (Inc) v CIR [1968] NZLR 193 (SC); [1968] NZLR 967 (CA)
Bowland v R 2001 FCA 160, [2001] 3 CTC 109 CA
BP Australia Ltd v FCT [1966] AC 224 (PC) Buckley & Young Ltd v CIR (1978) 3 NZTC
61,271 (CA) Case F67 (1983) 6 NZTC 59,897 Case F78 (1984) 6 NZTC 59,951 Case J92 (1987) 9 NZTC 1,518 Case L68 (1989) 11 NZTC 1,398 Case N8 (1991) 13 NZTC 3,052 Case X26 (2006) 22 NZTC 12,315 Christchurch Press Co Ltd v CIR (1993) 15
NZTC 10,206 (HC) CIR v Auckland Gas Co Ltd [1999] 2 NZLR 418
(CA) CIR v Banks (1978) 3 NZTC 61,236 (CA) CIR v Fullers Bay of Islands Ltd (2004) 21 NZTC
18,834 (HC) CIR v LD Nathan and Co Ltd [1972] NZLR 209
(CA)
CIR v McKenzies New Zealand Ltd (1988) 10
NZTC 5,233 (CA) Collector of Inland Revenue, Cook Islands v AB
Donald Ltd [1965] NZLR 679 (SC) Colonial Motor Co Ltd v CIR (1994) 16 NZTC
11,361 (CA) Conn (HM Inspector of Taxes) v Robins Bros Ltd
(1966) 43 TC 266 (Ch) Cox v CIR (1992) 14 NZTC 9,164 (HC) FCT v Western Suburbs Cinemas Ltd (1952) 86
CLR 102 Hawkes Bay Power Distribution Ltd v CIR
(1998) 18 NZTC 13,685 (HC) Highland Railway Co v Balderston (Surveyor of
Taxes) (1889) 2 TC 485 (IH (1 Div)) Law Shipping Co Ltd v IR Commrs [1924] 12 TC
621 (IH (1 Div)) Lindsay v FCT (1961) 106 CLR 377 (HCA);
(1961) 106 CLR 392 (Full Ct HCA) Lurcott v Wakely and Wheeler [1911] 1 KB 905 Margrett (HM Inspector of Taxes) v Lowestoft
Water and Gas Co (1935) 19 TC 481 (KB) Martinello v R 2010 TCC 432, 2010 DTC 1300 Milburn NZ Ltd v CIR (2001) 20 NZTC 17,017
(HC) Odeon Associated Theatres Ltd v Jones [1973]
Ch 288 (CA) O'Grady (HM Inspector of Taxes) v Bullcroft
Main Collieries Ltd (1932) 17 TC 93 (KB) Ounsworth (Surveyor of Taxes) v Vickers Ltd
[1915] 3 KB 267 Poverty Bay Electric Power Board v CIR (1998)
18 NZTC 13,779 (HC); [1999] 19 NZTC 15,001 (CA)
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland Protectorate [1933] AC 368 (PC)
Thornton Estates Limited v CIR (1995) 17 NZTC 12,230 (HC)
Samuel Jones & Co (Devondale) Ltd v CIR (1951) 32 TC 513 (IH (1 Div))
Sherlaw v CIR (1994) 16 NZTC 11,290 (HC) Vallambrosa Rubber Co Ltd v Farmer (Surveyor
of Taxes) (1910) 5 TC 529 W Thomas & Co Pty Ltd v Commissioner of
Taxation of the Commonwealth of Australia [1965] 115 CLR 58
55
Appendix: Legislation
Income Tax Act 2007
1. Section DA 1(1) and (2) provides: DA 1 General permission
Nexus with income
(1) A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is—
(a) incurred by them in deriving—
(i) their assessable income; or
(ii) their excluded income; or
(iii) a combination of their assessable income and excluded income; or
(b) incurred by them in the course of carrying on a business for the purpose of deriving—
(i) their assessable income; or
(ii) their excluded income; or
(iii) a combination of their assessable income and excluded income.
General permission
(2) Subsection (1) is called the general permission.
2. Section DA 2(1) provides: DA 2 General limitations
Capital limitation
(1) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature. This rule is called the capital limitation.