Page 642 - SAIT Compendium 2016 Volume2

IN 74 Income Tax acT: InTeRPReTaTIon noTes IN 74
• Has a new asset been created resulting in an increase in the income-earning capacity or does the work undertaken merely represent the cost of restoring the asset to a state in which it will continue to earn income as before?*
• Unless the structure or article on which repairs are deemed to have been done was damaged or had deteriorated and replacement was required, no repair for the purposes of section 11 (d) has taken place and no further inquiry need be made.†
• Materials used for the repair need not be identical to the original materials that are being replaced. As long as the purpose of the work is to restore the asset to its original condition, as distinct from creating an improvement, the work constitutes a repair. The fact that new materials are substituted for the old at a greater cost than would have been incurred had the same materials been used is not relevant. Each situation must be decided on its own merits in order to determine whether the use of new materials is for the purpose of improvement or merely for the purpose of restoring the asset to its original condition.‡
• Repairs undertaken at the same time as improvements may qualify for deduction under section 11 (d) if they can be clearly and separately identi ed from the improvements. Much will depend on the facts of the speci c case and the taxpayer will bear the onus of showing that what was undertaken was a repair. In ITC 1457§ the taxpayer converted residential ats on the upper oor of a two-storey building into of ces after the ats had fallen into disrepair. A quantity surveyor could identify certain of the work as repairs. The court found that the work so identi ed comprised repairs notwithstanding that it had been undertaken at the same time as the overall improvements. The amounts in question were in fact severable from the overall improvements and were allowable under section 11 (d). Similarly, in ITC 915¶ certain work done in the process of improving a roof was accepted by the court as repairs on the basis that it could be separately identi ed from the improvements.
• The addition of something to an asset that was not previously there will usually be considered to be an improvement rather than a repair. The underpinning of foundations to remedy cracks in a building,** the strengthening of retainer walls by the construction of new beams†† and the replacement of an existing solar heater with a better one‡‡ were held to be improvements because something was added that was not there before.
4.6 For purposes of trade or for which income is receivable
In respect of repairs of a property, a distinction is made between property occupied for the purposes of trade and property from which income is receivable. The reference to the word ‘receivable’ in section 11 (d) has the effect that repairs will be deductible regardless of whether income was received during the relevant year of assessment or not, as long as the property is capable of generating rental income during that year of assessment.
The preamble to section 11 clearly states that deductions will be allowed against the income derived by a person when determining the person’s taxable income from carrying on any trade. It follows that the taxpayer must have carried on a trade in order to qualify for the deduction of repairs.
In ITC 243§§ the cost of repairs to a building was incurred before the letting of the property. The cost of repairs was allowed as a deduction. In this case rent was received during a portion of the year of assessment in which the repairs were effected. The court held, allowing the appeal, that the meaning of the word ‘receivable’ was ‘capable of being received’ and that it was not necessary for the admission of the expenditure as a deduction that there should be in existence an agreement for the receipt of income.
In ITC 1475¶¶ the taxpayer had vacated residential premises with a view of earning income from those premises. Whilst the premises were empty, expenditure was incurred on repairs in order to render the property attractive to a prospective lessee and in anticipation of nding one. The court held that trading had commenced and that expenditure was accordingly deductible, but issued the warning that a determination as to when trading has commenced for this purpose must be made in the light of the facts of the case.
4.7 Spare parts used in repairs
Paragraph (a) (iii) of the de nition of the term ‘trading stock’ in section 1 (1) includes in that de nition ‘any consumable stores and spare parts acquired by the taxpayer to be used or consumed in the course of the taxpayer’s trade’. The effect of deeming spare parts to be trading stock is to bring them into section 22 with the result that the deduction is effectively deferred until the spare parts are used and no longer included in closing stock.
4.8 Treatment against the attack by beetles
Section 11 (d) permits the deduction of the cost of treatment against beetle infestation of timber forming part of premises used for purposes of trade or for which income is receivable. Such expenditure will be deductible irrespective of whether it has been incurred during an initial protective treatment or in the course of replacing infested woodwork.
4.9 Limitation of section 11 (d)
Section 11 (d) is limited by section 23H which provides that where any person has incurred any expenditure, which was or will be allowable as a deduction under section 11 (d), amongst others, the amount allowed to be deducted in any year of assessment shall be limited to the expenditure relating to goods supplied or services rendered during the relevant year of assessment.
* ITC 617 (1946) 14 SATC 474 at 476.
† ITC 626 (1946) 14 SATC 530 (U)
‡ CIR v African Products Manufacturing Co Ltd 1944 TPD 248, 13 SATC 164; ITC 1408 (1985) 48 SATC 21 (T). § (1989) 51 SATC 131 (T).
¶ (1960) 24 SATC 219 (F).
** ITC 1213 (1974) 36 SATC 113 (R).
†† 35 ITC 626 (1946) 14 SATC 530 (U).
‡‡ ITC 1263 (1977) 39 SATC 120 (R).
§§ (1932) 6 SATC 370 (U).
¶¶ (1989) 52 SATC 135 (T).
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