Edited version of your private ruling

Authorisation Number: 1012496932993

Ruling

Subject: Rental property - special levy

Question

Are you entitled to claim a deduction for the special levy imposed by the body corporate to repair damage?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You own a unit a strata titled complex. You purchased the property during the relevant financial year and it has been rented or available for rent since that date.

The building in which the property is located experienced damage over a period of time. Some damage relates to specific units and other affects common areas of the building.

The damage had occurred prior to you purchasing the property.

The owners' association obtained a quote to repair the damage. They have created a special levy to pay for the work.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Subsection 25-10(3)

Reasons for decision

Summary

You are not entitled to claim a deduction for the special levy as the work it relates to is considered to be an initial repair and not deductible.

Detailed reasoning

The owners' association of your rental property complex has levied a special contribution to fund repairs to the complex. 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 deductible then the contribution made is also deductible.

To determine if your special levy contribution is deductible, we first need to look at what the levy monies will be expended upon and the deductibility of those expenses.

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 denies a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing the character. 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 72 of TR 97/23 states repair expenditure is deductible where it is incurred during the period the property is held, occupied or used for bona fide income producing purposes and is attributable either to damage that occurs during income producing use of the property or to defects that emerge suddenly during that time.

However, expenditure incurred on an initial repair after the property is acquired, where the expenses are incurred in remedying defects or deterioration in existence at the time of purchase, is considered capital in nature. These expenses remain capital in nature even when some income is produced by the property prior to the initial repairs being incurred (paragraph 59 of TR 97/23).

As the damage to the rental property complex existed prior to you purchasing the property, the work undertaken to remedy the damage is considered to be an initial repair.

Initial repairs are capital in nature and not deductible. Therefore you are not entitled to a deduction under section 25-10 of the ITAA 1997 for the payment of a special levy raised to pay for this work.