In the Australian law, repairs (s 25-10 ITAA97) are considered for specific deduction when it comes to taxation. This is because the repairs cannot be considered under the general deduction provision. For Link Air Cargo, several facts can be derived with regards to tax deduction involved in repairs. Among them is that the expenses involved in the repairs should not be related to the cost of acquiring the assets. If this condition is not met, a company’s tax cannot be deducted in light of the upcoming or past repairs (Ellis, 2013).

Another fact to this scenario is that the repairs undertaken should not affect the functionality of the assets involved either positively or negatively. This means that the asset should have the ability of executing similar tasks with regard to when the repairs had not taken effect. Repairs should not diminish or improve the functionality prospects. It is expected that a repair will improve the condition of an asset, but when the functionality is improved this is no longer regarded as a repair.

The repairs involved in Links Air Cargo should not be incurred after the engines cease to be used for the purpose of earning assessable income. Deduction on the repairs will only take effect if during the period of the repairs the engines are used to generate assessable income. Under the repairs Taxation Act, there is also a provision that the process should not result in complete replacement of the entire asset. Only subsidiary parts can be replaced for this to be considered as a repair (Ellis, 2013). For Links Air Cargo, they should not replace the existing engines with new ones. If the engines are replaced entirely, the cost involved will be regarded as a replacement cost and not repair cost.

There are several taxation issues arising from the scenario provided. Among them is whether the modifications to be undertaken by Links Air Cargo are replacement of subsidiary parts or reconstruction of the entire engines.  If it is a replacement of the parts, the repair costs would hold. However, if it is a reconstruction of the entire engines, this would involve replacement costs. When it comes to deductions these costs are treated differently. This is because repairs entail non-capital expenditure while replacements entail capital expenditure.

Another taxation issue from the Scenario is whether the engines have depreciated to the extent where they warrant repair. It is under such circumstances that tax can be deducted from the repair costs. However, if the engines have not yet depreciated, this could be termed as advancement. Such costs are not catered for in the deduction of repair cost tax.

There are several case laws that can be used in order to explain Link Air Cargo’s scenario. Among them is the Rhodesia Railways Ltd v Income Tax Collector, Bechuanaland. Rhodesia Railways was a company registered in UK, and owned a railway that was 588 miles in terms of length. The railway has been spread over three territories namely: Union of South Africa, Southern Rhodesia and Bechuanaland Protectorate which covers 394 miles. The company is liable to payment of income tax to Bechuanaland Protectorate as a result of profit derived by operating in this region. In 1930, the company (appellants) had debited 252,174 pounds for renewal of permanent ways. In this year, the company had incurred losses of 97,445 pounds. Tax assessors (respondents) wrote back the item of 252,174 pounds deduction thereby converting the 97,445 pounds to a profit of 154,729 pounds. As a result, the respondent claimed a tax of 17,188 pounds (Barker, 2000).

Rhodesia railways objected the tax imposed on them and appealed the case to a special court in Bechuanaland. The special court dismissed the case, which later came under the review of the lordship. The facts were outlined in that the repairs that took place included laying down new shears in areas that were highly dilapidated. New rails were established and fastened on a length of 33.5 miles. Some new sleepers were also introduced in the area covered, but the weight of the railway did not change (Barker, 2000). In the ruling, the Lordships advised the majesty to allow the appeal by reversing the judgment of the special court involved. This meant that the deduction of 252,174 pounds claimed by Rhodesia railways would be allowed.

The ruling found in this case law applies to the facts derived above regarding the repair taxation. The lordship outlined that Rhodesia Railways should have had a deduction of 252,174 pounds which was incurred in the replacement of depreciated railway lines. The facts under Link Air Cargo scenario outlines that for a deduction to be allowed, the repairs should not include entire replacement of the assets involved. This is the case in Rhodesia Railways Ltd v Income Tax Collector, Bechuanaland. The railway line in Bechuanaland was 394 miles, and only 33.5 miles was subjected to repair. Although new rails and shears were established, the functionality of the railway was not affected. It remained in its initial state since the weight of the railway did not change. The expenditure incurred was also non-capital in nature (notional). This is because it was only used to restore the railway in its usual income generation prospects.

From the above information, it is prudent to be of the opinion that the advice provided by the engine manufacturer is not appropriate. This is because modification of the engines under this scenario would amount to entire replacement and not repair. This is because the engines have not yet depreciated for them to warrant the repairs. The other thing is that the modification will amount to changing the functionality of the engines. Link Air Cargo planes will have the ability of carrying more loads by increasing engine power and reduce fuel consumption. As a result, if the company goes with this advice, it will not have an opportunity of obtaining deductions from the cost incurred in the modification process. This is because the activities will not be termed as repairs.

References

Barker, D., 2000. Essential Australian law. Sydney, N.S.W.: Cavendish.

Ellis, E., 2013. Principles and practice of Australian law (3rd ed.). Sydney: Lawbook Co..

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