Edited version of private advice

Authorisation Number: 1052389859141

Date of advice: 28 April 2025

Ruling

Subject: Rental expenses - body corporate expenses

Question

Can you claim a deduction for the special building levy under section 8-1 of Income Tax Assessment Act 1997 (ITAA 1997) or section 25-10 of ITAA 1997?

Answer

No, you cannot claim a deduction under section 8-1 or 25-10 of the Income Tax Assessment Act 1997 as the special building levy you paid for remedial works required for your balcony to prevent further damage to the building is considered capital in nature.

This ruling applies for the following periods:

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

On XX XX 20XX you purchased a property located at XX XX for $XXX purchase price.

On XX XX 20XX the property was made available for renting.

The property has been available for rent for the entire time.

You rented the property through a real estate agent.

Your relationship to the tenants is landlord/tenant.

The property is leased at market rate determined by the real estate agent.

The property has never been used personally by you.

You did not obtain a building report when you first purchased the property, as you did not have much time as the property went to auction quickly after you found the property.

The property was in good condition, besides the bathroom which you renovated as well as some cosmetic upgrades.

An engineer advised the balcony works where required urgently within 12 months.

The strata committee shared the news with all the owners.

You had no choice according to the report and you would have to pay in full asap.

The engineer discovered structural issues which required significant repairs to balconies across the multiple apartments.

Key findings of the inspection included:

•         Remedial works required for all balconies to prevent further damage to the building

•         Spalling concrete repairs

•         Absence of a waterproofing membrane

•         Defects and non-compliance issues with balustrades

•         Balcony fall barriers not meeting National Construction Code (NCC) requirements

•         Deflection and sagging of balcony floor slabs

•         Balustrades requiring replacement with lightweight aluminium and glass to maintain floor slab and balustrade integrity

•         Balcony door sets needing replacement to prevent moisture infiltration into apartments

•         Recommendation to complete all remediation works across all balconies within 12-24 months

•         The strata board initiated these repairs, and each apartment owner was charged a special levy of approximate $XXX to contribute to the repairs.

These repairs ensure the build is up to standard by order of their local council.

The repairs were done by XX XX.

The repairs were done in two parts.

In XX 20XX part one was completed.

In XX 20XX part two was completed.

In XX 20XX the fire upgrade was completed.

No insurance or any other payment was received or will be received.

You have supplied the following documents:

•         XX City Council notice of intention to give a fire safety order dated XX XX 20XX

•         Strata Management Trust account receipt - special levy to fund fire upgrade order works $XX paid.

•         Strata Management Trust account receipt - special levy to fund remedial works $XX paid.

•         Strata Management Trust account receipt - special levy to fund remedial works $XX paid.

•         Strata Management notice of an extraordinary general meeting dated XX XX 20XX

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

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 remedy structural issues regarding balconies and install fire safety assets and undertake remedial works as noted in the council's fire order.

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 engineer's tender assessment report, repaired defects are acquired. As there was no building report obtained by you, we cannot confirm if these repairs were required when you purchased the property. For the size of the work done for the repairs and short amount of time from when you first purchased the property in XX 20XX to when the repairs were required. It is reasonable to assume they existed at the time of purchase. Consequently, the works are initial repairs, capital in nature, and the associated special purpose levy contribution is not a deductible expense.

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 automatic smoke/fire detection and alarm systems, emergency lighting, exit signs, fire doors, fire hydrant systems, fire seals, portable fire extinguishers, smoke alarms, heat alarms, a warning and operational signs. 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.

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

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