wer today please? What is the principle that separates repair/replace from upgrade when applied to real estate? If one has to replace an entire kitchen/bathroom etc. due to lack of TLC, could one claim this as an expense in the course of business or would
Important:
This answer is based on tax law year ending 28 February 2019.
Answer:
This is quite a complex issue in respect of which you have requested guidance. The basic principles however are relatively clear. The taxpayer of course, if SARS disputes the deduction claimed (as a repair), bears to burden to prove that the amount is deductible – see section 102(1)(b) of the Tax Administration Act.
Section 11(d), of the Income Tax Act, is relevant to your question and allows as a deduction, expenditure actually incurred during the year of assessment on repairs of property occupied for the purpose of trade or in respect of which income is receivable, including any expenditure so incurred on the treatment against attack by beetles of any timber forming part of such property and sums expended for the repair of machinery, implements, utensils and other articles employed by the taxpayer for the purposes of his trade.
We are not sure if the taxpayer owns the property, but the property will meet the requirement that it was property occupied for the purpose of trade or income is receivable in respect thereof.
The requirement is that it must be expenditure incurred on repairs of the property.
was stated by Judge Joubert, in Flemming v KBI,
“Die gemeenskaplike betekenis van al hierdie omskrywings in die woordeboeke van "repair". "repairs" en "herstel" is dat hulle betrekking het op die regmaak, opknap of herstel van 'n voorwerp wat in vergelyking met sy vorige toestand 'n gebrek of tekortkoming opgedoen het.”
My translation: The common meaning in the dictionaries of these definitions of “repair”, "repairs" and "herstel" are that they relate to the repair, refurbishment or restoration of an object which, in comparison with its previous condition, has suffered a defect.
The judge said one must apply the grammatical meaning of the word repair. The judge effectively held that there will be a repair if the purpose was to restore (something damaged, faulty, or worn) to a good condition.
The judge also considered whether a repair can be an improvement and said that “repair might involve some degree of improvement.” The judge referred to foreign precedent in respect of this, but then said that our courts have not laid down precise guidelines to distinguish “repair” and “improvement”. In Flemming’s case the Judge held that the amount was expended to improve (the water supply) of the farm and was therefore not a repair.
The principle is that if the property didn’t require to be repaired, it may well be an improvement.
SARS, in the practice generally prevailing, states the following:
It is immaterial whether repairs occur as a result of some fortuitous act, such as a storm or fire, or as a result of the wearing out, damage or deterioration of an asset by use. Restoration involves a renewal or replacement of subsidiary parts of the structure and the expenditure incurred will be deductible. However, if the damage is of such an extent that the asset is partially destroyed, it will then be necessary to consider whether the repair or renovation is a reconstruction of the entire asset, in which event the expenditure will not be deductible.
If the kitchen, bathroom or toilet needed to be repaired (probably restored due to damage), and that required replacement of what was in the room, it will be a repair of the property itself. But this is probably an example of where it would be difficult to distinguish and there may well be an element of an improvement when the replacement parts are different to the original parts. If it results in the creation of any new asset, it would not be a repair, but an improvement.
Judge Barry, in CIR v African Products Manufacturing Co Ltd, said the following that “the company was restoring the roof to its original condition and the fact that it used other material than that originally used was not for the purpose of improvement but for the purpose of restoring the roof to the condition in which it was originally.”
Where the expenditure was incurred because the
An example, when the owner of a restaurant that is operated under a franchise agreement, is told to change the appearance of the restaurant by using a different paint, wall paper, etc., it will not be because the existing paint, etc., required to be repaired. It would then be an improvement.
SARS view on the issue is found in the practice generally prevailing – issue 2.