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Edited version of private ruling

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Ruling

Subject: Rental Deduction-Special levies

Are you entitled to a deduction for a special levy for the replacement of a balustrade on the balcony of your rental property?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are the sole owner of rental unit.

You have rented the property since the time you purchased it several years ago.

The property comprises of a block of home units and each unit has an exterior balcony with a protective balustrade.

The balustrades have started cracking and dislodging bricks and the hand rails are starting to rust.

An engineers report was obtained and advised that the most effective repair was to remove the existing brick balustrade and replaced with new a balustrade.

A special levy was raised to fund the repair work.

You paid your share of the levy to the owner's corporation during the relevant income year.

Relevant legislative provision

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Where the body corporate has levied a special contribution to fund certain works, the character of an expense follows the purpose for which the expense was incurred. It follows that if the levy is used to fund expenditure which would be deductible then the contribution made is also deductible.

To determine if the special levy is deductible, we look at what the levy monies will be expended upon. In your case, the levy was raised for the replacement of a defective balustrade forming part of a balcony in each unit.

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states expenditure incurred by you for repairs to premises used by you for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature.

Taxation Ruling TR 97/23 provides the Tax Office's view on repairs that are allowable under section 25-10 of the ITAA 1997 and indicates that expenditure for repairs to property is of a capital nature where:

Replacement of a subsidiary part or an entirety

In the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

In your case, the building is itself considered to be the entirety. The balustrades are considered a subsidiary part of the building.

Improvement v Repair

The Commissioner accepts that the use of a different material does not necessarily prevent the work from being a repair, provided the work merely restores a previous function to the property. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

In your case we consider the work to be undertaken to your rental property merely restores the efficiency of the previous function.

Therefore, the work to be undertaken is considered to be a repair and you are entitled to a deduction under section 25-10 of the ITAA 1997 for the payment of a special contribution levied for this work.

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