Edited version of your private ruling

Authorisation Number: 1012440527180

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to claim your share of the body corporate fees for work to the drainage system, water supply and roadway of your rental property as a repair?

Answer

No.

Question 2

Are you entitled to claim your share of the body corporate fees for work to the drainage system, water supply and roadway of your rental property as a capital works deduction?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You brought a rental property unit over ten years ago and it has been leased continually since then.

You have paid the body corporate your share of costs to have the following work done to the property:

· Improvement to ground level stormwater collection

· Replacement of the entire bitumen roadway

· Fire service installation.

The ground level stormwater collection will be improved by the addition of drainage grates in the driveway as well as to some garages which do not have them at present.

The roadway is privately owned and is not the responsibility of the local council.

All of the bitumen driveway will be replaced, and the crushed rock sub-base will be re-stabilized.

Only the sections of existing curb and channel which are damaged will be replaced.

As the domestic water supply is being replaced, a fire service will be installed as a part of the infrastructure upgrade.

The work will be completed in the relevant financial year.

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 Paragraph 43-20(3)(a)

Reasons for decision

Body Corporate fees and charges

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. Similarly, if the body corporate levies a special contribution for major capital expenses to be paid out of the general purpose sinking fund, you will not be entitled to a deduction for this special contribution amount. This is because payments to cover the cost of capital improvements or repairs of a capital nature are not deductible;

Repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

The word repair is not defined within the taxation legislation.  Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

Taxation Ruling 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. 

In Lindsay v. Federal Commissioner of Taxation (1960-1961) 106 CLR 377; (1960) 12 ATD 197; (1961) 12 ATD 505; (1960) 8 AITR 99; (1961) 8 AITR 458; it was held that expenditure incurred to renew a slipway was a renewal of an entirety and was not deductible as a repair under section 53 of the Income Tax Assessment Act 1936 (which was rewritten as section 25-10 of the ITAA 1997). This conclusion was drawn on the basis that the slipway was considered to be a separately identifiable capital item, maintaining its own function. Substantially the whole of the old slipway had been demolished and replaced by a new slipway, comprising all new components and was a renewal of a separately identifiable item and not a repair.

TR 97/23 at paragraph 38 considers a property is more likely to be an entirety if:

· the property is separately identifiable as a principal item of capital equipment

· 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

· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves, or

· the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

Driveway

The letter from the body corporate states that the entire bitumen driveway will be replaced and the crushed rock sub-base will be re stabilized.

Because of this, we consider that you will be replacing the entirety of the driveway.

As the replacement of an entirety is capital in nature, it is not deductible under section 25-10 of the ITAA 1997. Also, a deduction is not available under section 8-1 of the ITAA 1997 (the general deduction provision) as this provision also excludes expenses of a capital nature.

Stormwater drainage and Fire Service

The work carried out to the stormwater drainage is described in your application as an improvement.

The fire service will be a new installation.

As such, these works will be of a capital nature as described in TR 97/23, as

· the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair'.

Capital works deduction

Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements that are used for income producing purposes.

The deduction is available on the cost of constructing structural improvements or extensions, alterations or improvements to structural improvements if construction started after 26 February 1992. Paragraph 43-20(3) (a) lists a sealed driveway as an example of a structural improvement.

For structural improvements the annual special building write-off allowable is 2.5 per cent of the construction expenditure for a period of 40 years. Construction expenditure is the actual cost of constructing the capital works.

In your case, the works done to provide the new fire service, improve the stormwater drainage system and replace the roadway have been classified as capital in nature and are considered to be capital works for the purposes of Division 43 of the ITAA 1997.

You are entitled to claim an annual capital works deduction at a rate of 2.5% for your share of the costs for these capital works. This deduction is available while the property is being rented or available for rent, up to a maximum period of 40 years.