Reference no: EM132712020

Question -  Construction Co Pte Ltd ('Constructco') is a Fiji company. Constructco carries on a construction business (roads, bridges, large buildings) throughout the Fiji islands. The company's tax year is the calendar year. Constructco depreciates all depreciable assets on a straight line basis. Subco is a subsidiary of Constructco. Roadworks Ltd ('Roadco') is also a construction company but unrelated to either Constructco or Subco.

2017 - On September 1 Constructco purchases a grader for $100,000 from Roadco. The grader is four years old and was originally acquired by Roadco for $250,000. Constructco immediately puts the grader to use in its business. After just a few days work the grader's clutch fails. The clutch is found to be thoroughly worn out and is replaced with a new clutch at a cost of $5,000.

2018 - Constructco continues to use the grader in its construction business. In early December the grader's exhaust system disintegrates, being thoroughly eaten out by rust. The exhaust system is replaced with a new exhaust system at a cost of $8,000.

2019 - Constructco continues to use the grader in its construction business. In March, Westpac lends money to Subco. Constructco guarantees the loan and as additional security grants Westpac a mortgage over the grader. In August, Subco defaults on its loan to Westpac. Demands for payment addressed to the borrower (Subco) and to the guarantor (Constructco) are not satisfied. To Westpac things look ominous - perhaps the group is in real trouble. In October Westpac (exercising its powers as a mortgagee) takes possession of the grader and sells it (exercising its mortgagee's power of sale). The grader is sold (by public auction) for $50,000. The sale monies are used by Westpac to pay money due on the Subco loan ($40,000) and the remainder ($10,000) is returned to the mortgagor Constuctco.

One further fact - The grader acquired by Constructco in 2017 replaced a rather similar machine (the 'old grader') owned by Constructco. Here are some details concerning the old grader. The old grader had been acquired for $200,000. At the start of 2017 the old grader had a written down value of $0. The old grader was used in Constructco's business until August 2017 when it was sold for $15,000. The disposal gave rise to a nominal receipt of $15,000 that prima facie is to be included in gross income (s.34(1)(a)). However, Constructco served notice on the CEO that the company elected to defer recognition of the gain (s.34(4)).

Required - What deduction or deductions (if any) are available in calculating Constructco's chargeable income for the years 2017, 2018 and 2019? Briefly explain your calculation and include reference to any relevant section (or subsection etc).