From Uncertainty to Objectivity: Reforming Tax Deductions for Repair Costs in Australia

Abstract

In Australia, the cost of repairing an asset used to produce assessable income is immediately deductible under s 25-10 of the Income Tax Assessment Act 1997. To claim this deduction, the repairs must not be of a capital nature. The courts have developed three tests to distinguish repair costs from capital expenses. The first test, the ‘initial repair test’ is fairly sound. However, the other two tests, which focus on replacing and improving assets, are far less reliable. This article begins with a general discussion on repairs and critiques the three tests used for characterising repair costs. It explores the rationale for allowing immediate tax deductions for repair costs and the significant difficulty involved in producing coherent and consistent tax outcomes in practice. Next, the article demonstrates this difficulty through a survey of case law, arguing that the current rules need to be clarified. Lastly, the article recommends that new tax rules be adopted to deal with repair costs, to complement the existing regimes governing depreciating assets and capital works, simplify tax administration and reduce compliance costs.