Edited version of private advice

Authorisation Number: 1052393955761

Date of advice: 12 May 2025

Ruling

Subject: Rental property deductions

Question 1

Can you claim a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for your share of the portion of the special levy expenses incurred that relate to the cost of the replacement balustrade of your unit's balcony?

Answer 1

No.

Question 2

Can you claim a deduction under section 25-10 of the ITAA 1997 for your share of the portion of the special levy expenses incurred that relate to the cost of remediation of waterproofing membrane of your unit's balcony?

Answer 2

No.

Question 3

Can you claim a capital works deduction at the rate of 2.5 % per year over 40 years for your share of the portion of the special levy expenses incurred for the remedial works that relate to the cost of installation replacement balustrade and waterproofing of your unit's balcony?

Answer 3

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

In XXX 20XX you and your xxxx purchased the property at xx xxxx xx as tenants in common, with a 50 percent ownership interest each.

The unit is X of XX in the complex.

The property was built in 19YY.

At the time of purchase, you obtained a Purchasers Strata Inspection report dated DD MM 20YY. The strata inspection, at item XX regarding building defects or other matters, reported no issues relating to the balconies or balustrades, and, that the historical records inspected also made no reference to any major or extraordinary expenditure.

Your xxxx lived at the property and paid you 50% of the market rent until MM 20YY. You reported this income on your individual income tax return.

Between MM 20YY and MM 20YY your xxxx did not pay you any rent.

From MM 20YY the property has been leased through a real estate agent.

In MM 20YY your partner purchased your XXXX's 50 percent ownership interest in the property.

In MM 20YY the strata manager commissioned an engineer's report for inspection of the units on behalf of The Owners Corporation as some occupants had reported cracking and separation around their respective unit's balconies.

The report, dated DD MM 20YY, identified that the balcony balustrades did not comply with the current National Construction Code and the balconies had either not been waterproofed, or passed its lifespan.

The report noted that:

•                     balustrades on some units were below the current height minimum and considered a safety hazard

•                     the majority of the balconies were not waterproofed as waterproofing membrane had either, passed its expected lifespan (10 years), or was due to inadequate surface preparation prior to waterproofing

•                     water ingress was observed along the soffit of balcony concrete slabs in the form of staining, efflorescence and blistering paint and if not remediated, concrete spalling can arise causing cracking, dislodgement and significant structural damage.

The report recommended:

•                     replacement of existing balustrades with new

•                     balcony waterproofing membrane installed to all balconies.

On DD MM 20YY, at an extraordinary general meeting, the Strata Corporation resolved to proceed with the tender provided for the remedial works. It was agreed that the existing balustrades be demolished and replaced with aluminium framed frosted glass panels.

The engineering tender application detailed the following work to be completed on all balconies:

•                     remove and replace existing waterproofing membrane to prevent water ingress

•                     remove tiles, screed any existing membrane back to clean substrate

•                     temporary removal of balcony doors to enable waterproofing

•                     install aluminium water-stop at door thresholds

•                     provide sealant fillets or coving to all floor-to-wall junctions

•                     provide overflows

•                     install puddle flanges

•                     prime balcony slabs

•                     apply two coats of waterproofing membrane

•                     install sand and cement screed and prime screed

•                     apply secondary waterproofing layer

•                     lay non-slip tiles

•                     provide control joints

•                     apply sealant at junction points and edge of skirting tiles

•                     grout remaining tile joints

•                     replace existing balcony balustrades with new compliant systems

•                     existing balustrades removed and disposed of, and temporary fall arrest barriers installed

•                     make good all penetrated external surfaces

•                     replace cavity flashing to all unit balconies

•                     reinstate existing surface finish to match existing

•                     disposal of all waste materials.

The meeting also resolved to raise a special levy for the works fund to subsidise the remedial balcony work.

Your share of the special levy was $xx.xxx. You incurred this expense on payment to the special levy in two instalments which you paid on DD MM 20YY and DD MM 20YY.

The work is due to commence on DD MM 20YY and expected to be completed within X months from this date.

A certificate of compliance is required on completion of the works.

Relevant legislative provisions

Income Tax Assessment Act section 8-1

Income Tax Assessment Act section 25-10

Income Tax Assessment Act Division 43

Reasons for decision

General deductions - special levy

Section 8-1 of the 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.

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

Repairs and improvements

Section 25-10 of the ITAA 1997 provides that 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, subsection 25-10(3) of the ITAA 1997 precludes a repair deduction if the expenditure is of a capital nature. The following are examples of expenses which are capital expenditure or of a capital nature:

•                     replacement of an entire structure or unit of property (for example such as a complete fence or building, a stove, kitchen cupboards or refrigerator).

•                     improvements, renovations, extensions and alterations; and

•                     initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. TR 97/23 explains that '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 and contemplates the continued existence of the property. To repair property improves to some extent the condition it was in immediately before the repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

Paragraph 15 of this ruling explains that a repair involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state, or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. A repair is work done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) over a period of time.

It is necessary to consider whether the work done to property constitutes repairs by considering whether the work restores the efficiency of function of the property without changing its character. Repair is distinct from renewal or reconstruction; a repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety.

Work done to part of a building, though not amounting to a replacement or reconstruction of an entirety may still be capital expenditure and not deductible, for example, because it amounts to an improvement. Paragraphs 44 to 57 of the TR 97/23 detail the distinction between a repair and an improvement.

Paragraph 48 provides that if expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue.

Paragraph 49 provides that 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.

In many repair processes, there is some improvement made to property as a result of technological advancements or more modern material. The greater the degree of technological advancement or enhancements arising due to the use of modern materials generally indicates the work completed is an improvement or change in the character of the property rather than a repair.

Paragraph 50 provides that if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement.

As outlined in Paragraph 51, the test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10 of the ITAA 1997.

Apportionment

Paragraph 55 to 57 of TR 97/23 covers repairs done at the same time as improvements. The character of a repair does not necessarily change because it is carried out at the same time as an improvement. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. If individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually affected from the capital cost of the improvements.

Balustrades - replacement

The balustrade was replaced as it was unsafe and did not comply with the current National Construction Code.

Paragraph 96 of TR 97/23 provides that 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 and the various factors discussed in the ruling. 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.

Paragraph 99 of TR 97/23 provides that if government regulations require something to be added to a property, 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 your case, the existing brickwork balustrade was not replaced on completion of the waterproofing. Instead, they were replaced using new metal and glass balustrades that meet with current building construction codes. Further, it is considered they will significantly modernise the appearance of the building and would be expected to enhance its market value.

Balcony waterproofing

The installation of waterproofing membrane to all balconies involved exposure of bare concrete substrate followed by application of new waterproofing membrane to a clean concrete slab and installation of coving and puddle flange. The work undertaken on the balcony was done to restore the balcony so that it performed its intended function effectively.

In your case, we also consider that the improved waterproofing, cavity flashing, coving and non-slip tiling will likely extend the useful life of the building.

The waterproofing has resulted in an improvement to the property as it will decrease the likelihood water ingress and deterioration of the balconies into the future. It will also extend the expected life of the balconies. Therefore, an immediate deduction is not available for the waterproofing of the balconies.

Capital works

Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works include buildings and structural improvements. Capital works also includes alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

The deduction can be claimed for 40 years from the date construction is completed. The rate of deduction per income year is 2.5%.

Application to your circumstances

In your case, the special purpose levy was used by the body corporate to undertake remedial works that involved the replacement of balustrades and balcony waterproofing.

The engineering report found there was inadequate or deteriorated waterproofing and that balcony balustrades were below minimum height due to previous building standards when the building was first constructed that are now outdated. The report recommended that waterproofing be addressed to prevent structural damage, and the balustrades replaced to meet current building safety hazard standards.

Waterproofing works will be undertaken to the units' balconies following water ingress due to the absence of waterproofing or to inadequate surface preparation prior to waterproofing and deterioration over time as identified in the building engineer's report. The purpose of the waterproofing is to protect the concrete slabs in the long term.

Remediation to your unit's balcony through waterproofing will be done to prevent concrete spalling in the future. Therefore, the work being done is consequently not a repair or replacement. The waterproofing of the balcony constitutes a capital works deduction as it was done to prevent future damage and is not maintenance or repair work.

Maintenance expenses are periodic recurring expenses incurred to keep an asset in good working condition. The contribution to the special levy is a substantial one-off expense and is not considered to be a maintenance expense that is deductible under section 8-1.

In this case, the waterproofing has resulted in an improvement to the property as it will decrease the likelihood of deterioration of the balconies into the future. It will also extend the expected life of the balconies. Therefore, an immediate deduction is not available for the installation of waterproofing membrane of the balcony.

We also consider that non-slip tiling of the balconies and installation of the metal and glass balustrades will significantly modernise the appearance of the building and would be expected to enhance its market value.

Therefore, we believe the majority of the work done to be an improvement. This portion will be eligible for the 2.5% capital works deduction once the works are completed.

You can claim a capital works deduction of 2.5% over 40 years for the waterproofing of your balcony from the date construction is completed and paid for from funds held in the special levy.

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