Edited version of private advice

Authorisation Number: 1052188331046

Date of advice: 1 November 2023

Ruling

Subject: Rental property - deduction

Question

Are you entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of the special levy that was paid to the body corporate for repairs to your rental property in the 20XX income year?

Answer

Yes.

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs made to premises or depreciating assets used solely for producing assessable income.

However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature. An improvement to a property would be capital in nature and is therefore not deductible.

Taxation Ruling TR 97/23 Income tax: deductions for repairs provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Paragraph 49 of TR 97/23 states: 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.

Where the body corporate has levied a special contribution to the general-purpose sinking fund to finance 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 otherwise deductible then the contribution made towards the levy is also deductible.

In your case, you were required to pay a special levy to finance work to be carried out on the common areas of the unit complex. The works undertaken are to rectify damage that has occurred to the common areas of the roof membrane within property. The repairs restore the efficiency of the function of the property without changing its character and are not considered to be capital in nature. Therefore, you are entitled to a deduction for the expense incurred for the special levy.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX/XX/20XX, you purchased a property.

After the property had settled, you engaged with a property management agent and leased the property. The property continues to be leased.

The property is located within a complex of units.

The body corporate engaged with Company A to undertake an inspection of several units, including your unit, due to there being apparent water penetration issues.

On XX/XX/20XX, an inspection of the units was undertaken. The inspection report found water seepage and penetration in all the inspected units. Your unit had not been inspected previously. The inspection report noted deterioration and discolouration of the ceiling plaster in the bedroom. The report outlined that the water entry had been occurring for an extended period.

In XX/20XX, an inspection report was prepared which outlined the following:

•         Previous repairs had been undertaken to provide an isolated solution, however there were limitations in their success.

•         It was difficult to attempt to continue to isolate the repairs as the roof was completely covered with gravel and the existing membrane contained asbestos.

•         The roof membrane was reaching the end of its lifespan with the likely development of further problems in the future.

•         A replacement of the roof membrane should occur.

On XX/XX/20XX, the roof membrane was replaced.

A special levy of $XXXX was due and payable in one instalment as per unit entitlement for the purpose of the roof membrane replacement.

In XX/20XX and XX/20XX, you paid a total of $XXXX for the special levy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

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