Case Study Three: Baby Warehouse

Baby Warehouse is a retail baby goods business located in far north QLD. Following a cyclone, its main retail premise in Cairns was damaged. The cyclone caused substantial damage to the roof and car park. The car park gravel surface had been washed away leaving many holes and loose stones. This has left it unsafe and unattractive to potential customers. The engineer's report estimated that about 50% of the carpark was damaged. The owners were advised by an engineer that should a cyclone occur again, the damage would be even greater. Therefore, it was decided that the entire car park be resurfaced and replaced with reinforced concrete. It was estimated to cost $110,000 to replace the gravel in the carpark with new gravel, whereas the new concrete cost the company $200,000. This amount was paid on 30th June 2024.

Additionally, the company paid $42,000 to have the whole roof replaced. The cyclone caused damage to several parts of the roof and guttering causing it to leak. The building is approximately 4 years old. The same materials were used as was previously used on the roof (ceramic tiles). The company was invoiced for the $42,000 on 1 June 2024 and paid a deposit of $10,000 at that time. The remaining amount was paid on 15 July 2024. The roof construction work was completed on 15 May 2024.

As a result of the cyclone damage, considerable financial strain has been placed on the business. Baby Warehouse has joined a group of local business people who are considering legal action against the council for failure to implement and erect up-to-date cyclone warning systems. The lobby group believes that these warning systems would have given business owners more time to put in place protection strategies for their businesses. Already the group has engaged a lawyer and Baby Warehouse's share of these legal fees for the 2024 income year was $15,000. It is envisaged that mediation will occur in the 2023 income year. If a positive outcome is reached for the group, this is likely to be in the form of compensation to cover loss of income and repair costs.

Required:

Discuss with reference to appropriate (and most relevant) legislation, case law and/or rulings whether the expenses described above are deductible for Baby Warehouse in the 2024 income year. You should discuss each tax issue separately.