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Edited version of your private ruling
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Ruling
Subject: Body corporate levies
Question
Are you entitled to a deduction for the cost of contributions to a special purpose fund paid to the body corporate of your investment property?
Answer:
No
This ruling applies for the following period
Year ending 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts and circumstances
You purchased a unit in 200X and lived in the property until 2011.
The property was then tenanted for a period of time. During this time you became aware of considerable problems with the property.
The problems have existed when you purchased the property.
You were unaware of the problems when you purchased the property.
Your share of the expense was paid into the body corporate Special Levy - Building Rectification Work fund.
There will also be minor costs incurred in the 2012-13 financial year for the same rectification work.
The property is no longer rented.
Once rectification work has been carried out the property will be re-tenanted.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10.
Income Tax Assessment Act 1997 Subsection 25-10(3).
Reasons for decision
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of 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 taxation legislation. Accordingly, it takes its ordinary meaning. In (W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58); (1965) 14 ATD 78; (1965) 9 AITR 710, it was 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.
Taxation Ruling 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 works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or
· the work is an initial repair.
TR 97/23 states that expenditure incurred on an initial repair after 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 not deductible under section 25-10 of the ITAA 1997.
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.
It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price reflected the need for repairs.
In your case, the work is considered to be an initial repair as the expenses relate to rectifying defects which were in existence when you purchased the property. The fact that you did not know of the problem at the time of purchase is irrelevant.
Therefore, as the works to be carried out on the property are capital in nature, you are not entitled to a deduction for the contributions you have made to the body corporate special levy fund under section 25-10 of the ITAA 1997.
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