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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 89
3) Idenfiable asset test – costs of conversion/replacement, repairs, maintenance and improvements
Expenditure on repairs and maintenance is generally of a revenue nature and deducble, whereas expenditure on
replacements and improvements are generally of a capital nature and not deducble (but may be depreciable)
Poverty Bay Electric Power Board
and
Hawkes Bay Power Distribuon Ltd
o
Judgment
The costs of replacement of overhead power lines with underground cables were of a capital nature –
underground cables were a new asset disnct from the overhead power lines
Auckland Gas Co Ltd v Commissioner of Inland Revenue
[2000] 3 NZLR 6 (PC)
o
Facts
Auckland Gas’ underground gas system leaked and had to be repaired
They fixed the leak by placing a smaller pipe inside the larger damaged pipe – this also had the
addional benefit of allowing the pipes to be operated at a higher pressure
o
Submissions
Auckland Gas argued that it was not creang a new distribuon channel like in
Hawkes Bay Power
Distribuon
– it was using the exisng channel of pipes and inserng a new pipe in it
o
Judgment
The idenfiable asset is the urban network of gas lines – is the idenfiable asset such that it could be
said a new asset has been created?
Aſter installing the new pipe, the old pipe became redundant – the new pipe is a new
idenfiable asset that replaces an older inefficient network as the old pipes cease to carry
gas
Furthermore, as the pipe could now be operated more efficiently and at a higher pressure,
the character of the pipe had been changed – therefore, the work was a replacement or
improvement, and the costs were of a capital nature
Although it looks like a repair, the nature of the repair is so comprehensive that it became a
replacement
The taxpayer’s objecve as to whether they incur maintenance or capital expenditure doesn’t maer
Replacing an object may be cheaper and beer than patching and mending
Adding value is not necessarily the test as repairs usually add value too
R
ELEVANT
CASE
LAW
Hallstroms Pty Ltd v Federal Commissioner of Taxaon
(1946) 72 CLR 634 (HCA)
o
Judgment (Dixon J)
“… the contrast between the two forms of expenditure corresponds to the disncon between the
acquision of the means of producon and the use of them; between establishing or extending a
business organizaon and carrying on the business; between the implements employed in work and
the regular performance of the work in which they are employed; between an enterprise itself and
the sustained effort of those engaged in it.”
In each of these examples, the former are capital expenses, and the laer are revenue
expenses
“What is an outgoing of capital and what is an outgoing on account of revenue depends on what the
expenditure is calculated to effect from a praccal and business point of view, rather than upon the
jurisc classificaon of the legal rights, if any, secured, employed or exhausted in the process.”
The queson is what the purpose of the expenditure is and its effect on the business
organisaon – it is not about what legal rights are being acquired
Looks at the need or purpose for the expenditure – this is the key to discerning whether an
expense is capital or revenue
If it is to do with the business structure, it will likely have an enduring advantage and
will be a capital asset
If it is consumpon as part of the income-earning process, it is likely to be ordinary
expenditure in regular conduct
Commissioner of Taxes v Nchanga Consolidated Copper Mines
[1964] AC 948
o
Judgment (Viscount Radcliffe)
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