Edited version of private advice

Authorisation Number: 1052328493332

Date of advice: 21 November 2024

Ruling

Subject: Rental property - deductions

Question 1

Can you claim a deduction for the special purpose levies which funded the roof replacement works to the building in which you own and lease out an apartment?

Answer 1

No.

This private ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts

You acquired a property. (The property)

The property was acquired by you on XX XX 20XX.

The property has always been used as a rental property.

The property is a unit and is managed by a strata management company.

The strata management company have reviewed previous year's Annual General Meeting (AGM) minutes and have confirmed that the deterioration in the item's condition was being considered in 20XX after other works were done in 20XX. Several repairs have been made since this time to extend the lifespan of the item.

Investigations have been undertaken to repair the item and the last contractor engaged declined to repair the item due to the poor condition.

You are unable to repair sections of the item as a composite item has been discontinued.

The item has been improved and additional items have also been upgraded. This has increased the cost of the works.

An Extraordinary General Meeting (EGM) was held recently. At the EGM it was resolved that a special levy per unit was to be levied to fund the works.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Summary

The special levies paid to fund the roof replacement works are not deductible expenses. However, deductions may be allowed under Division 40 and Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

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 the levy monies were used for are deductible.

Repairs

Section 25-10 of the ITAA 1997 states 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, a deduction is not allowable if the expenditure is of a capital nature, for example, an initial repair.

TR 97/23 provides the Commissioner's view on repairs that are allowable under section 25-10 of the ITAA 1997 and 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 work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

•                     the work is an initial repair.

Application to your circumstances.

In your case, the special purpose levy was used by the body corporate to undertake the roof replacement works.

Remedial works - initial repairs.

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature.

In your case, the roof replacement works, repaired defects existing at the time the property was acquired. Consequently, the works are initial repairs, capital in nature, and the associated special purpose levy contribution is not a deductible expense.

However, you can claim a capital works deduction under Division 43 of the ITAA 1997.

Division 43 of the ITAA 1997 provides a deduction for capital works used for income producing purposes. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5% per year. The capital expenditure can be deducted over 40 years.