AAT Decisions
Expenditure qualified as being for repairs
19.12.2008
A taxpayer which operated an aluminium smelter and manufactured its own carbon anodes (which were used in the process of producing aluminium) in an anode bake furnace on its site has been allowed a repair deduction for expenditure on works which included the demolition and rebuild of the refractory in the anode bake furnace and refurbishment and upgrade of the fume scrubber in the furnace (Alcoa of Australia Ltd v FCT [2008] AATA 1128).
The facts clearly showed that the different elements of the bake furnace operated together in one integrated process to produce anodes and each of the elements was essential to the efficient production of anodes. The bake furnace was, therefore, to be regarded as the entirety. The refractory was physically, commercially and functionally an integral part of the entirety. It followed that the cost of replacing the refractory was on revenue account and, therefore, allowable as a deduction under sec 25-10 ITAA 1997 (repairs).
The AAT made the following comments which are of interest:
“It is clear … that the periodic repair of defects that are the result of normal wear and tear in operation is on revenue account. Such repairs ordinarily improve the function of the item repaired. In that sense every repair results in an improvement. However the issue is not whether there is an improvement but whether the expenditure in question results in a new and distinct asset. Further, a repair may also involve the use of different materials, provided it does not result in a change in the character of the item repaired …
In the Tribunal’s view it is clear that the need for the Works arose as a result of the normal wear and tear of operating the Bake Furnace …
Finally, the Tribunal notes that after carrying out the Works the Bake Furnace would have the same capacity with only minor and incidental improvements. The Tribunal therefore finds on this ground also that the Works did not constitute an improvement, and that they are not of a capital nature.”
