Edited version of your written advice

Authorisation Number: 1051378503235

Date of advice: 28 May 2018

Ruling

Subject: Rental expenses

Question

Are you entitled to a deduction for a body corporate levy of $X for the cost of underpinning work to rectify subsidence issues?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You own a rental property in NSW.

You were given a notice of Special Levy which you are required to pay.

You were advised this amount was for remedial building works within the building, to restrict further movement and consequential building damage to the internal areas of the property to rectify subsidence issues.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

Section 25-10 of the 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.

Repair or improvement

Paragraph 45 of TR 97/23 states that to distinguish between a ‘repair’ and an ‘improvement’ to property, one need’s to consider the effect that the work done on the property has on its efficiency of function.

If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property’s efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

In your case, you are the owner of a rental property that has been rented for many years. You are having or have had work carried out to stabilise and re-support existing structure to restrict further movement and damage to the building. Therefore, you have restored the property to its original condition, function and appearance.

The works restores the property to its former appearance without changing its character. The expenditure incurred in doing this is a repair and therefore deductible under section 25-10 of the ITAA 1997.