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Ruling

Subject: rental property works

Question 1

Are you entitled to an immediate deduction for your portion of the contributions paid for the common property work?

Answer

No.

Question 2

When the works have been completed, are you entitled to a 2.5% deduction for your portion of the contributions paid for the common property capital works?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have a joint share in a rental property.

You recently acquired the property.

The unit is part of a complex. At the time you acquired the property, it was in need of work.

The body corporate organised the work to be carried out due to concrete cancer in the outside wall.

The work included:

· common property window replacement,

· swing stages re-caulking of the vertical and horizontal joints to the common property exterior of the building,

· common property ground floor glazing and handrails,

· balcony sliding door,

· other common property works to basement and ground floor garbage room door, and

· concrete repairs.

You were required to pay part of the cost in January 2010 and the remainder by May 2010 to the body corporate in relation to your portion of these works.

The unit was rented for part of the time while the works were carried out, however the tenant left due to the disruption and noise caused by the work. The unit was available for rent during the whole time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10.

Income Tax Assessment Act 1997 Division 43.

Reasons for decision

The body corporate has levied additional contributions to finance certain works to the common property. 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 otherwise deductible then the contribution made towards the levy is also deductible.

Taxation Ruling IT 2505 states that common property is that part of a strata plan not comprised in any proprietor's lot and includes facilities intended for common use. The ownership of the common property varies under different State Acts and Territorial Ordinances.

In your state the ownership of common property is vested in the body corporate as agent for the proprietors as tenants in common in proportions equal to their respective lot entitlements.

To determine if your contribution to the levy is deductible, we first need to look at what the levy monies will be expended upon. It does not matter whether the contribution is paid into a special purpose fund or into the body corporate administration fund or general purpose sinking fund. The fund to which the payment is made does not alter the nature of the payment.

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenditure incurred for repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. The courts have held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. (W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710).

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is an allowable deduction.

TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

· the extent of the work carried out represents a renewal or reconstruction of the entirety, or 

· the work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

· the work is an initial repair. 

In your case, it is relevant to consider whether the work carried out is an initial repair.

Paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after the property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not therefore deductible under section 25-10 of the ITAA 1997. TR 97/23 further states that the cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

In your case, when you acquired the property the deterioration caused by the concrete cancer was already present. It is acknowledged that you derived some rental income before the works were carried out, however, the works carried out were not occasioned by factors that occurred during your period of income production, that is, the deterioration arose before your income producing use of the property.

Therefore as the need for the work existed when you acquired the property, the associated expenses do not relate to your assessable income producing use of the property. Furthermore they are regarded as initial repairs and are therefore capital in nature. Repairs that are capital in nature are not deductible under 25-10 of the ITAA 1997. However, they may qualify for a capital works deduction under Division 43 of the ITAA 1997.

Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works include buildings or extensions, alterations or improvements to buildings. The works carried out on your investment property are capital works for Division 43 purposes.

Under section 43-30 of the ITAA 1997, capital works deductions are not available until the construction of the capital works has been completed. This is so, even though you used the property for rental purposes before completion.

The relevant rate in your case is 2.5% and deductions are claimable for 40 years from the date that the work is completed where the property is used for income producing purposes.

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