Edited version of private advice

Authorisation Number: 1051686767372

Date of advice: 27 May 2020

Ruling

Subject: Body corporate expenses

Question

Can you claim a deduction for the special purpose levies which funded remedial works to the building in which you own and lease out an apartment?

Answer

No

This ruling applies for the following periods:

Year ended 2015

Year ended 2016

Year ended 2017

Year ended 2018

The scheme commences on:

1 July 2014

Relevant facts and circumstances

In early 20XX, you purchased an apartment.

After purchasing the apartment, you commenced residing in it.

Later that year, the council issued a fire safety order. This advised that an inspection of the building had revealed that the building was deficient in fire safety and egress facilities.

The order stated that you were ordered by the Council to remedy deficiencies because the building was unsafe; lacking among other things proper provision for the detection, controlling and extinguishment of fire, and adequate provision for escape in the event of a fire emergency.

A number of years later, you leased your apartment. You had moved out.

The apartment has been leased ever since.

You have declared the income earned from leasing the unit and have claimed deductions for expenses such as strata levies, council rates and water rates.

XXX Management is the managing agent of the apartment block.

The owners raised special levies referred to as "Administrative Fund Special Levy" to fix the building's deficiencies and make it safe. This was in addition to the normal Administration Fund and Capital Works (Sinking) Fund.

You wish to claim a deduction for the $XXXXX that you paid in special levies whilst you were renting out the property.

You do not seek a deduction for the special levies paid when you were living in the unit.

It was compulsory to comply with the fire order. If you had not, council could have applied to a court for an order that the building not be occupied until it complied with fire regulations.

The special levies paid for work which remedied the deficiencies identified in the order, and made the building, and therefore your unit, safe.

The works enabled you to continue to rent the unit out.

The fire safety measures implemented in the building included the following:

·         Automatic smoke detection and alarm system.

·         Building occupant warning system.

·         Emergency lighting.

·         Exit signs.

·         Fire collars.

·         Lightweight fire resisting construction provided to the underside of all floors.

·         Fire stopping protecting openings in fire resisting components of the building.

·         Portable fire extinguishers.

·         Single station photoelectric smoke alarms to sole occupancy units.

·         Solid core doors (provided to all sole occupancy unit entry doors and the doorway to the ground floor level laundry).

·         Fixing the external stairs. They did not provide acceptable access to and from the building because of defective balustrades, handrails and deficiencies in the steps themselves.

·         Certification of electrical installation. Any deficiencies relating to wiring, fittings and accessories should be remedied and a certificate obtained verifying safety.

On completion of the work a final fire safety certificate was needed for the council.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

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.

You may be able to claim a deduction for body corporate fees and charges for your rental property. Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied for a special purpose fund.

Payments you make to body corporate administration funds and general-purpose sinking funds are considered to be payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time you incur them. However, if the body corporate requires you to make payments to a special purpose fund to pay for particular capital expenditure, these levies are not deductible. This applies even if the work was done to meet the requirements of regulatory bodies (Taxation Ruling 97/23 Income tax: deductions for repairs (TR 97/23), paragraph 25).

Therefore, we need to consider whether the expenses the levy monies were used for are deductible.

Repairs

Section 25-10 of the ITAA 1997 states expenditure incurred by you for repairs to any premises, or part of premises, 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 initial repair.

TR 97/23 provides the Commissioner'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:

·   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.

Application to your circumstances.

In your case, the special purpose levy was used by the body corporate to install fire safety assets and undertake remedial works as noted in the council's fire order.

Fire control assets - renewal or reconstruction of the entirety.

The term 'entirety' is used by the courts in repair cases to refer to something separately identifiable as a principal item of capital equipment. TR 97/23 paragraph 8, states that an item is more likely to be an entirety if the thing is a separate and distinct item of plant in itself from the thing or structure which it serves.

The levy was used to purchase portable fire extinguishers, smoke alarms and a building occupant warning system. These are separately identifiable assets and capital in nature. Consequently, the portion of the levy used for these items is not deductible.

More information on fire control assets, and their depreciation under Division 40 of the ITAA 1997, can be found by searching for QC 58664 on the ATO website.

Remedial works - initial repairs.

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of affecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred (TR 97/23, paragraph 59).

In your case, the remedial works, specified in the fire order, repaired defects existing at the time the property was acquired. Consequently, the works are initial repairs, capital in nature, and the associated special purpose levy contribution is not a deductible expense.

However, you can claim a capital works deduction under Division 43 of the ITAA 1997.

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