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Expenditure on Repairs to Income-producing Property

8.198. Two aspects in relation to repair expenditure have been raised. The first relates to what are generally termed initial repairs, being repairs carried out shortly after the acquisition of property. The second refers to the widely accepted practice by business of treating replacement purchases of plant and small tools, of relatively low value, as repair expenditure rather than as items falling to be dealt with by way of depreciation.

8.199. In the case of repairs carried out shortly after the acquisition of property, usually to buildings and to other structural improvements, the practice has developed, in line with a number of legal decisions, of disallowing a deduction for this expenditure where it is apparent that the repairs were necessary at the time of purchase, the general theory being that this would normally be reflected in the purchase price. This practice has been criticised on the ground that it causes administrative difficulties in the case of minor repairs and some inequity.




  ― 114 ―

8.200. The Committee believes it would be in the interests of taxpayers and the Revenue if a somewhat more flexible approach could be followed, though it is aware that if its recommendations for building depreciation are adopted, some of the complaints will tend to weaken: at present if an allowance is denied for building repairs no deduction is available. The Committee recommends that deductions be allowed for costs of repairs incurred shortly after acquisition, where the expenditure relates to normal maintenance such as painting and minor building repairs. It agrees that major structural repairs, such as the replacement of roof cladding, carried out in the initial period of ownership should continue to be treated as forming, in effect, part of the cost of the property. This is an area in which the issue of guidelines or public information bulletins would be of assistance to taxpayers and their agents.

8.201. A more flexible approach would also be desirable in relation to purchases of plant and tools of small value. Many large business organisations attempt to lessen clerical costs by writing off, in the year of purchase, minor items of plant and maintenance equipment as it is purchased. It is usual to follow this practice of write-off, subject to a limit of, say, $200 for any one item. By so doing, the need for detailed recording of the asset in depreciation schedules is avoided. The Committee recommends that the Commissioner give favourable consideration to requests of taxpayers to be allowed to deal with minor items of a capital nature in this way, within the statutory authority that it is proposed he be given in paragraph 8.47.

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