Income Tax Deductions: The Story Behind Specific Deductions
Experience has taught me that taxpayers are quite conscious of the way in which they structure their tax affairs. I am increasingly surprised by my clients’ general tax knowledge.
But certain issues always remain a topic of discussion due to its ambiguous nature. For example the repairs and maintenance-deduction. S11(d), S23H, S23(c) and S23(b)sets out the requirements and provisio’s under which such an expense may be claimed as deduction against gross income. But what is always interesting is how these sections develop and the case law surrounding it.
As with most decisions in regards to the determination of the deductibility of expenses incurred the unique facts of the case will drive the conclusion forward. Various case law/judgements has however lead to certain principles that provided the backbone of the section in the Income Tax Act. It is submitted that objective application of these principles together with the requirements in the relevant sections in the Income Tax Act will lead to the correct classification of the revenue or capital nature of the expense item. According to the principles laid down in various case law, repairs and maintenance are thus deductible when:
- The repair constitute a restoration of a subsidiary part of the whole of the asset repaired;
- The materials used to effect the repair should be the same kind of materials that was originally used in the asset;
- The repair may not lead to an improvement of the asset, i.e. there may not be as consequence of the repair an increase in the income producing capacity of the asset.
In ITC1475 a taxpayer did repairs to his old house to obtain better rental. Although some repairs were done before the taxpayer moved out, the majority was done after he moved into his new home. Due to the inconvenience of the repairs done in the first month after he moved out, the rental income for said month was remitted. The Commissioner disallowed the repair incurred as deduction claiming it was not production of income as it was not fir for occupation, i.e. there was no income generated, therefore the expense was disallowed.
This decision was however turned by the Special Court as it determined that the property was a ‘lettable proposition’ and that the expense was incurred by the taxpayer before he started trading and deemed the expense as deductible.
As many taxpayers own investment property, I have found that the costs of repairs effected on such property is always presented to me for consideration as deduction. Although each case is unique and judged on merit, it always important to keep S23(b) in mind. It comprises of the famous ‘negative test’, which states that an expense is deductible to the extent that it was actually incurred for the purposes of trade. In other words, if repairs were incurred during periods which there was no income accrued, the repair will not be deductible except if the taxpayer can prove that the property was a ‘lettable proposition’.