Seminar-8.docx - Seminar Week 8 1 Monsearch Pty Ltd owns a...

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Seminar Week 8 1. Monsearch Pty Ltd owns a small office block on the wharves at Sydney harbour. The roof of the building is in danger of collapsing. The company obtains 2 quotes: Repair the roof $ 26,400 Replace the roof $ 37,000 The company elects to replace the roof. In preparing the company’s 2013/2014 tax return the company accountant claims a deduction for $26,400 on the basis that had the company repaired the roof, the company would have been entitled to a deduction for this amount. Since the company has elected to replace the roof to avoid any potential for future harm, the company will elect to claim the deduction for the amount that would have been paid if the roof had been repaired. Advice on the deductibility of this claim. No deduction for ‘notional’ repairs A taxpayer can only obtain a deduction for the cost of the repairs which are actually carried out. This means that a taxpayer who incurs expenditure that is non-deductible due to it is a capital improvement cannot successfully claim. Under s25 (10), “notional” repairs defines as the amount is estimated the repair work would have cost to merely repair the item. FC of T v Western Suburbs Cinemas Ltd Facts: A theatre owner spent $6000 replacing a broken-down ceiling with a new improved ceiling. This work was held to be a capital improvement and not deductible as a repair. As an alternative, the taxpayer claimed a deduction for $1,200, being estimated cost of merely repairing the ceiling with similar materials to those originally used (without improving it). Decision: The Court held that the taxpayer was not entitled to any deduction for the “notional” expenditure of $1,200. Therefore, Monsearch chose to replace the roof with $37,000, the ‘notional’ amount of repairing the roof of $24,600 is not deductible. The company may not be deduct in repair but it can be deduct after selling the small office block under Capital Gain Tax. Monsearch Pty Ltd also owns and operates a small fleet of delivery vans for the purpose of supplying their retail and hospital customers. Recently a delivery van was purchased at an auction for $45,000 and one of the company’s staff drove it from the auction house to the company premises. The van is used for deliveries immediately but within a day the engine starts to give the driver trouble. A mechanic looks at the engine and tells the driver that the engine needs extensive repairs – estimated cost $9,500.
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The mechanic’s comment is that the engine must have been on the point of failure when the company bought the van. Determine whether the company will be able to claim a deduction for the repairs to the van’s engine.
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