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Edited version of your written advice
Authorisation Number: 1012862162901
Date of advice: 18 August 2015
Ruling
Subject: Rental property repairs
Question
Are you entitled to a repairs deduction for your share of the special levy to have the complex rendered?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You and your spouse own a rental unit in a complex.
The unit is currently rented.
The corporate body has decided to have the whole complex rendered.
The corporate body is setting up a special fund for this purpose under the care of the Strata Manager.
The complex is made from brick, has no issues and was not originally rendered.
The complex will be rendered for cosmetic purposes.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Reasons for decision
Where the body corporate has levied a special contribution to fund 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 deductible then the contribution made is also deductible.
To determine if the special levy is deductible, we look at what the levy money will be expended upon. In your case, the levy will be used to render the complex.
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that expenditure incurred by you for repairs to any premises, or part of premises, plant, machinery, tools or articles 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 improvement.
Taxation Ruling TR 97/23 provides the Tax Office's view on expenditure that is allowable under section 25-10 of the ITAA 1997.
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.
Consequently, what is considered to be a repair for the purposes of section 25-10 is determined by the facts of each case.
Improvement v Repair
TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.
Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.
In your case, the rendering of the complex is considered to be an improvement. The rendering will improve the cosmetics of the building which can reasonably be expected to enhance its saleability and market value. Therefore you are not entitled to a repairs deduction under section 25-10 of the ITAA 1997.
Additional information
You will be entitled to a 2.5% capital works deduction in relation to your share of the cost of the capital improvement once the cost has been charged to the special fund.