Question

Furnaces Pty Ltd was advised by a local building inspector that one of the chimneys on its premises was unsafe and, unless it was repaired, the factory would have to be closed. Furnaces decided that it was not feasible to stop operations to repair the chimney, so they gained permission to build an alternative chimney adjacent to the old chimney, thereby allowing production to continue. They found that although the new chimney was substantially the same size and make as the old one, it was cheaper to build than it would have been to repair the old one. Also, the new chimney can better ventilate the weather, which was not available in the previous one. After the new chimney was erected, the old chimney was demolished. Is any amount allowable as a deduction for the cost of the new chimney?n

Answer 1

Capital expenditure

Explanation:

The enhancements made to the factory building are capitalized as a way of adding worth to the already present building. A recently fitted chimney will be treated as capital expenditure thus should not be subtracted but in its place should be stated as an addition to Furnaces Pty Ltd assets.

Knocking down expenses with regard to the old chimney will be treated as expenses to the old chimney where they will reduce its value. These expenses can be associated with the old chimney as depreciation or any other type of expense that can be associated with an asset. Thus, there will be no amount of allowable deduction for the cost of the new chimney and the cost associated with demolition of the old chimney will be treated as an expense.