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Ruling

Subject: Deduction-special building levy

Question 1

Are you entitled to a deduction for a special levy imposed on unit owners of a property owned under strata title for expenses incurred for work undertaken to the façade, balconies, balustrades, new tiles on balconies, the new coating system of building, the replacement of the metal sheeting, guttering, repairing downpipes, replacement of the roof flashing, replacement of the existing fixings with galvanised bolts, additional weep holes, site establishment, the access equipment and clean up cost?

Answer:

Yes.

Question 2

Are you entitled to a deduction for a special levy imposed on unit owners of a property owned under strata title for the following expenses;

· the removal of asbestos materials

· structural reinforcement to a number of walls

· removal of old render

· re-rendering

· install wall ties

· installation of expansion joints

· replace various cracked bricks

· part of the costs for development application approval?

Answer:

Yes.

Question 3

Are you entitled to a deduction for the portion of the special levy you have paid for the installation of new air vents, flashing, a new guttering along one wall and a fire issue?

Answer:

No.

Question 4
Are you entitled to a capital works deduction for your share of the costs for the installation of the new vents and flashing, a new guttering along one wall and a fire issue?

Answer:

Yes. 

This ruling applies for the following periods

Year ended 30 June 2011
Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You own a strata titled unit in a building complex (the property) and have rented it since purchase.

A building assessment of the property was undertaken and the following problems were identified:

· the existing coating system of the property was in poor condition due to water retention

· the existing render on the building had suffered from salt damage

· the balconies and balustrades were in poor condition and unsafe

· the roofing material was weathered and awning tiles had outlived their serviceable life

· water was leaking and moisture was migrating through the timber flooring and joist system

· a balcony awning has an insufficient slope and inadequate flashing back to the building's wall

· poor design of the a top floor room

· defective waterproofing under a balcony

· lack of vents and flashing in one external wall

· roof skylights had inadequate seals

· poorly installed roof flashing.

The body corporate of the complex held an extraordinary general meeting for the owners of the property. It was resolved at the meeting that a special levy would be raised to pay for the following remedial work to the property:

· remove old membrane coating and apply new coating

· replace the existing fixing for the post and replace with galvanised bolts

· remove existing old flashing and install new flashing

· remove balustrades, tiles, cement sheeting and other fixtures on the balconies of the property and install balustrades, replace the cement sheeting and waterproof all balcony areas and re-tile the balcony's surfaces

· cut in new weep holes and install new flashing in cavity wall near a balcony to allow water to run into the cavity of the building

· remove and install new steel arch bar above sliding door

· repaint the property

· extend some downpipes

· replace leaking skylights

· reinstate aerial on roof

· install new vents and flashing.

Installation of new roof
A section of the property roof was raised to comply with Building Codes of Australia. In addition the remaining weathered roof sheeting and roof tiles were to be replaced by installing colourbond sheeting over the entire roof.

One unit owner was responsible for the new roof structure of the top floor unit and new skylights and suitable pan capping.

The other unit holders were responsible for the cost of the removal of existing metal roof sheeting and tiles, the installation of the new colourbond roof sheeting, new gutters and downpipes, and new flashing in the roof.

Fire issue
The underside of the new raised section of the roof was to be bricked up to achieve compliance.

Other expenses

· removal of asbestos materials

· structural reinforcement to some walls to reduce water entry as part of the process of the new coating application

· removal of the contaminated render

· re-rendering

· install wall ties to restrict the movement of a course of bricks

· installation of expansion joints

· replace various cracked bricks in the building

· council costs for development application to raise the roof and altering the height of the balustrades.

A special levy was raised to pay for the remedial works.

You made a contribution to the special levy.

You have provided receipts to substantiate your claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 25-10.
Income Tax Assessment Act 1997 subsection 25-10(3).

Income Tax Assessment Act 1997 section 43-10

Reasons for decision

Special Levy

The body corporate of your rental property complex has levied a special contribution to fund repairs to the common area of the complex. 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 your special levy contribution is deductible, we first need to look at what the levy monies will be expended upon and the deductibility of those expenses.

 You have advised the levy was used by the body corporate to undertake remedial work to the property.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. However there are also provisions in the income tax law which deal with specific deductions, including repairs and capital works (section 25-10 and Division 43 of the ITAA 1997).

Section 25-10 of the ITAA 1997 states that expenditure incurred by you for repairs to any premises, or part of premises, plant, machinery, tools or articles held or used by you solely 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, for example, an improvement.

Taxation Ruling TR 97/23 provides the Tax Office's view on expenditure that is allowable under section 25-10 of the ITAA 1997.

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.

Consequently, what is considered to be a repair for the purposes of section 25-10 is determined by the facts of each case.

The meaning of repairs
The term 'repairs' is not defined in section 25-10 of the ITAA 1997. Therefore, it is necessary to look at its ordinary meaning. Paragraph 13 of Taxation Ruling TR 97/23 states the following: 

The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

At paragraph 44, the ruling goes on to state:

 In the case of a 'repair', broadly speaking, the work restores the efficiency of function of the property without changing its character...

Work done solely to meet requirements of regulatory bodies

To constitute a repair for the purposes of section 25-10 of the ITAA 1997, work done to meet requirements of regulatory bodies must satisfy the general principles. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section.

If Government regulations, for instance, require something to be added to property (e.g., an automatic sprinkler system to a building or an air bag to a motor vehicle), work done to comply with this requirement does not constitute a repair because it is not work done to remedy or make good any defect, damage or deterioration in a mechanical or physical sense. In any event, this is likely to involve capital expenditure and be excluded from section 25-10 of the ITAA 1997.

Replacement of a subsidiary part or an entirety
Determining what is the entirety is a question of fact in each case. According to TR 97/23, property is more likely to be an entirety if:

(a) the property is separately identifiable as a principal item of capital equipment; or

(b) the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

(c) the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

(d) the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law (paragraph 38 of TR 97/23).

Property is more likely to be a subsidiary part rather than an entirety if:

(a) it is an integral part of some larger item of plant; or

(b) the property is physically, commercially and functionally an inseparable part of something else (paragraph 39 of TR 97/23).

Improvement v repair

This distinction is discussed at paragraphs 44 to 54 and 120 to 124 of TR 97/23. In regards to repairs versus improvements and the use of different material, 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 or restores the efficiency of the previous function. 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.

The principles outlined in paragraphs 44 to 46 were established in W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78 (Thomas's case) and Federal Commissioner of Taxation v. Western Suburbs Cinemas Ltd (1952) 86 CLR 102 (Western Suburbs case). In Thomas's case a company bought a premises and had work done on the roof, walls and floor of the building. It was held that a 'repair' involves returning a thing to its former condition without changing its character and that 'it is restoration of efficiency in function rather than exact repetition of form or material; that is significant'.

In the Western Suburbs case, the ceiling of a motion picture theatre was in a state of disrepair. To restore it to its original condition would have cost 603 pounds. The company instead replaced the ceiling with a new one of different design and better material for a cost of 3000 pounds. It was held that the work done was an improvement because it replaced a ceiling with a new and better one which had considerable advantages, including reducing the likelihood of repair bills in the future.

Substantial improvements, additions, alterations and modernisations are not repairs. Some of the factors pointing to an improvement rather than a repair are whether: the modification work has effected an improvement to the asset; there is greater efficiency of function of the property; there is an increase in the value of the asset; and the expenditure reduces the likelihood of future repairs.

If an asset was in disrepair at the time of its acquisition, the cost of initial repairs to remedy those defects is of a capital nature and non-deductible because it would have be taken into account in the purchase price.

Application of the above to your situation 

A review of the specification document and other information supplied by you indicates the work undertaken is not considered an initial repair or a renewal or reconstruction of the entirety. The work undertaken to the following areas and items of the property:

· the work undertaken to apply new coating system

· the replacement of the existing fixing with galvanised bolts

· the replacing and installing new of flashing

· the installing of the new steel arch bar above a sliding door

· the repainting of property

· are considered repairs on the basis that work merely restores the area or item with their modern equivalent and restored area or item to their original function.

Balustrades
The work undertaken to replacement of the balustrades is considered a repair as they have been replaced with their modern equivalent.

Balconies
The work undertaken on the replacement balconies indicates the replacement balconies have merely been repaired by its modern equivalent and restored the original function of the balconies. While the new weep holes and the installation of new flashing in the cavity wall near one balcony reduces the migration of water there are no significant advantages as it would be expected that all balconies would be constructed in a similar manner thus reducing water migration to unwanted areas of the property.

Roof, guttering, downpipes and flashing
The removal and replacement of the weathered sheeting and tiled sections of the roof are not considered an initial repair or a renewal or reconstruction of the entirety. A review of the information provided indicates the work carried out is not considered an improvement and therefore the cost of replacing the roof is not of a capital nature.

It is accepted the use of metal sheeting to replace the tiled section of the roof constitutes a repair as the change in material did not improve the efficiency or function of the property. The work undertaken on the roof indicates the roof has merely been repaired by its modern equivalent and restored the original function except for cost to raise a section of the roof. Similarly the work undertaken to replace the gutters and to extend the downpipes and to replace the flashing are also considered repairs.

Therefore, you are entitled to a deduction for the cost of replacing the roof sheeting guttering, downpipes and flashing of your rental property under section 25-10 of the ITAA 1997.

In addition site establishment, the access equipment and clean up expenses are also allowable deductions as part of the repairs as they were incurred to part of the cost to undertake the remedial work to rectify the damage to the building.

Other expenses
The removal of the asbestos materials, the contaminated render, the re-rendering, the replacing of various cracked bricks in the building and the installation of the expansion joints are also allowable deductions as part of the repairs incurred to rectify the damage to the building's facade and balconies. In addition a deduction is allowed for a portion of those council approval costs that relate to work that is considered a repair as part of the development application. It should be noted that the council approval costs in relation to raising the roof would not be deductible. Therefore, you are entitled to a deduction for the above contingency expenses under section 25-10 of the ITAA 1997.

Work to a number of walls
The work undertaken to reinforce a number of walls was undertaken to reduce further cracking of the walls. This work arose as part of the requirement for the application of a new coating system to the building to reduce the risk of water entering through the new coating. As the work was undertaken as part of the repair to the coating system of the property a deduction is allowed as a repair under section 25-10 of the ITAA 1997.

Wall ties
The installation of the wall ties provides an increase in efficiency of function and to reduce the necessity for future repairs to a section of a wall it is considered to be minor and not an improvement. You are entitled to a deduction for the wall ties as part of the above other expenses under section 25-10 of the ITAA 1997.

Vents and flashing
The work associated with the installation of cavity flashing and vents is not a repairing damage but rather modifying the building to improve the efficiency of function of the property and to reduce the necessity for future repairs. In effect, this work was not a repair but an improvement.

New guttering system
The work associated with the installation of new guttering system does not replace an existing guttering system on the building but rather modifies the building to improve the efficiency of function of the property that is to provide a greater flow of rain water off the roof. In effect, this work was not a repair but an improvement to the building. Therefore you are not entitled to a deduction for the new guttering under section 25-10 of the ITAA 1997.

Fire issue
From the information provided the work undertaken to resolve the fire issue appears to be as a result of raising the roof to meet the requirement of the Building Codes of Australia. As noted previously were work is solely to meet requirements of regulatory bodies it is not a repair for the purposes of the section 25-10 of the ITAA 1997. The expenditure is of a capital nature as it is not work done to remedy or make good any physical or mechanical defect, damage or deterioration of property. A deduction is not allowable under section 25-10 of the ITAA 1997.

An immediate deduction is not allowed for any portion of the special levy that is raised specifically for improvements/capital works. For example the portion of the levy that was raised to install the vents, flashing, the new guttering along one wall and the fire issue are considered to be an improvement as the work will be new to the building and not a repair. However, you may qualify for a capital works deduction under Division 43 of the ITAA 1997 for these items.

Capital works
Under Division 43 of the ITAA 1997 a taxpayer can claim a deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements. Under section 43-10 of the ITAA 1997, a taxpayer can claim a deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements. The deduction is either 2.5% or 4% of the construction expenditure, depending on when construction started and how the capital works are used.

In the case of residential rental properties, a taxpayer can deduct certain kinds of construction expenditure and the deduction is generally spread over a period of 25 or 40 years. In cases where building or structural improvements started after 15 September 1987, a deduction can be claimed an annual rate of 2.5 % of the construction expenditure for a period of 40 years.

A deduction is only available for the number of days that a property is rented, or available for rent, in any income year from the date that the works are completed

In your case, your share of the cost of the work undertaken for the installation of new air vents, flashing, the new guttering along one wall and the cost to resolve the fire issue are an allowable deduction under the capital works provisions.

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