Edited version of private advice

Authorisation Number: 1052343805458

Date of advice: 22 January 2025

Ruling

Subject: Deductions - body corporate

Question 1

Can you claim a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of the special levy paid to the Body Corporate for repairs to the Apartment Complex.

Answer 1

No.

Question 2

Can you deduct the portion of the special levy paid to the Body Corporate for repairs that are not initial repairs under section 25-10 of the ITAA 1997?

Answer 2

Yes

Question 3

For the purposes of determining the amount you can deduct pursuant to section 25-10(1) of the ITAA 1997, will the Commissioner accept the time-based apportionment methodology as proposed by you that limits the date of initial repairs to no earlier than MM 20XX?

Answer 3

Yes. Paragraph 64 of Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides for a time-based apportionment methodology for initial repairs, which compares construction date, acquisition date and the date repairs are completed and apportions the total repair costs between pre-acquisition and post-acquisition periods.

We accept that a portion of the repair costs relate to damage that may have occurred since you acquired Apartment X in 2021 and further the defects may have matured during that time between acquisition and completion of the works in MM 20XX. This would result in approximately X % of the costs being treated as initial repairs and capital expenditure and thereby excluded from deductibility under subsection 25-10(3) of the ITAA 1997. Approximately X% of costs would be deductible under section 25-10(1) of the ITAA 1997. In other words, of the total amount of $X, approximately $X incurred would be deductible under section 25-10(1), and the balance would be a capital expense that is excluded under subsection 25-10(3).

In conclusion, the works undertaken at least partially relate to initial repairs and are capital in nature and are not deductible under section 25-10 of the ITAA. However, rectification of any issues that arose after you acquired the unit are non-capital repairs and deductible under section 25-10.

This private ruling applies for the following periods:

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own Apartment X in the Apartment complex which you acquired on DD MM 20XX. The Apartment complex is a multi-storey single tower residential complex with X number of apartments. Although you are unable to determine the exact date as to when the construction of apartment complex was completed, the Body Corporate was registered on DD MM 19XX.

Since acquisition, you have used Apartment X to derive assessable income as part of a continuous letting pool, except for a X-week period when level X was not accessible to anyone aside from tradespeople carrying out rectification works.

Prior to the purchase of Apartment X, you obtained the following reports:

•                Strata pre purchase report, which referenced the initial report dated DD MM 20XX in relation to water ingress and damage through window/door assemblies highlighting that the balcony drains have been sealed causing water to build up and not drain away. The Pre purchase report also referenced the Committee Meeting held DD MM 20XX, where it was noted that the sealant was applied when the building was repainted in 20XX.

•                Pre purchase inspection report for the Apartment X.

Damage at the apartment complex

The Apartments have damage caused by water ingress through window and door assemblies. The damage was first detected in a report dated MM 20XX.

The Body Corporate engaged various consultants to investigate, assess the damage, and make recommendations. The following reports were obtained:

•                'Report on water Ingress & damage through window/door assemblies' by ABC dated DD MM 20XX.

•                'Preliminary report on water penetration issues' by DEF dated DD MM 20XX.

•                'Summary report on investigative works to water penetration Issues at the balcony sliding door and window glazing and prototype recommendations' by DEF dated DD MM 20XX.

•                'Apartment complex structure and envelope condition report' by GHI dated DD MM 20XX (GHI Report). The GHI Report was commissioned to audit the condition of the structure and envelope of the Apartment complex based on a rope access visual inspection of the tower facades and walk-around visual inspections of roofs, basement carparks, utility rooms, swimming pools and other common property structures.

•                'Window Audit Report, Second Avenue' by GHI dated DD MM 20XX (20 XX GHI Window Audit Report), and

•                'Apartment complex Unit X Prototype Glazing Replacement Works Debrief by GHI dated DD MM 20XX. (20XX GHI Debrief Report).

Works in respect of the damage

On DD MM 20XX, at an Extraordinary General Meeting (EGM) of the Body Corporate, a majority of the members in attendance resolved to enter into the following contracts to remedy the damage:

•                XX Contracting Pty Ltd for the contract sum of $X plus GST, a contingency of $X and a XLevy of X% ($X), being a total of $ X, and

•                MNO Management Services for the contract sum of $X plus GST and a XLevy of X % ($X), being a total of $X .

The XX progress claim worksheets apportion XX costs into the following categories: Deposit, Access, Windows Doors, Balcony Refurbishment, Internal works, and Air Con.

Access for the works

Access for the Works requires use of an XX system, to provide external vertical access to the apartments and facilitate management of site materials to the corresponding work levels.

Door and window works.

The door and window works are being undertaken in relation to all the doors and windows of the apartment complex and involves:

•                removing the existing doors and windows, which could not be reinstalled after removal.

•                removal of any residual waterproofing compound or membrane (if any)

•                patching, filling and/or bridging any cavities, holes, voids, deterioration, crumbling, or concrete spalling in the door/window hobs after removal.

•                applying new water-proofing detail

•                for the kitchen windows - installing a new semi-supported cavity bridge with the new joinery to bridge the existing cavity in the building envelope and provide for a compliant waterproofing detail and a subsill fixing point.

•                installing new doors and windows in a "like for like" format.

Balcony refurbishment works

The Balcony Refurbishment works are being undertaken to re-waterproof all the balconies of the Apartment complex and involves:

•                removal of existing tiles, bedding, screed and any remaining waterproofing membrane

•                grinding or shot blasting to return the substrate to bare concrete

•                remediate damage and prepare surfaces for the new waterproofing application and installation

•                install new waterproofing and tiles.

Internal works

The Works contract includes rectification of any pre-existing water damage to tiles, mirrors, floor surfaces, cooktops, benchtops, splash backs, cupboard doors and anything else within the work zone caused by water leakage from the doors and windows.

Where additional work is required that were not directly caused by the water leakage from the doors and windows (Additional Work) in any apartment, and if the Additional Work is approved by the apartment owners, the apartment owners pay additional amounts for the Additional Works over and above the special levies paid for the principal Works contract.

Air conditioning unit works

The Works contract includes decommissioning and recommissioning air conditioning unit compressors, which need to be removed and replaced to undertake the Works or where the ducting needs to be redirected through the new joinery.

Where air conditioning unit ducting was penetrating an external wall of the property, the Works include repair, fill, retexture and touch up of the external paintwork.

In certain circumstances, air conditioning units may be determined to be in poor condition or not functioning to their best capacity. In these cases, the apartment owner is given the option of replacing the existing unit with a new unit. In these cases, the apartment owners pay additional amounts for the new units and additional work items over and above the special levies paid for the principal Works contract.

The special levy contributions

At the Body Corporate EGM in 2022, the members resolved that a special sinking fund contribution amounting to $XXXXXXX including GST be raised to fund the Body Corporate's obligations for the Works.

The special levies were paid in seven instalments each for $ XXXXXXX (Total $XXXXXXX). Each notice included the words 'Tax invoice', invoice numbers, and due dates.

All works were completed on schedule by MM 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 subsection 25-10(1)

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

Reasons for decision

Issue

Deductions - rental property repairs - body corporate special levies

Question 1

Can you claim a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of the special levy paid to the Body Corporate for repairs to the Apartment Complex?

Answer1

No.

Question 2

Can you deduct the portion of the special levy paid to the Body Corporate for repairs that are not initial repairs under section 25-10 of the ITAA 1997?

Answer 2

Yes

Question 3

For the purposes of determining the amount you can deduct pursuant to section 25-10(1) of the ITAA 1997, will the Commissioner accept the time-based apportionment methodology as proposed by you that limits the date of initial repairs to no earlier than MM 20XX?

Answer 3

Yes. Paragraph 64 of Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides for a time-based apportionment methodology for initial repairs, which compares construction date, acquisition date and the date repairs are completed and apportions the total repair costs between pre-acquisition and post-acquisition periods.

We accept that a portion of the repair costs relate to damage that may have occurred since you acquired the Property in 2021 and further that the defects may have matured during that time between acquisition and completion of the works in July 2024. This would result in approximately 65% of the costs being treated as initial repairs and capital expenditure and thereby excluded from deductibility under subsection 25-10(3) of the ITAA 1997. Approximately X % of costs would be deductible under section 25-10(1) of the ITAA 1997. In other words, of the total amount of $ X, approximately $X incurred would be deductible under section 25-10(1), and the balance would be a capital expense that is excluded under subsection 25-10(3).

In conclusion, the works undertaken at least partially relate to initial repairs and are capital in nature and are not deductible under section 25-10 of the ITAA. However, rectification of any issues that arose after you acquired the unit are non-capital repairs and deductible under section 25-10.

Detailed reasoning

Under section 25-10 of the ITAA 1997, you can deduct expenditure that you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income. However, you cannot deduct capital expenditure under section 25-10.

Were the special levies 'incurred' on receipt or payment of the notices?

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) (paragraph 4) explains that there is no statutory definition of the term 'incurred' for income tax purposes. However, as a broad guide:

•                you incur an outgoing at the time you owe a present money debt, that you cannot escape (paragraph 5).

•                an outgoing is 'incurred' if you are 'definitively committed', or 'completely subjected', to the outgoing (subparagraph 6(a)).

•                the debt must be more than impending or expected. There must be a presently existing liability that is not contingent, or dependent on some other thing (paragraph 18).

Special purpose funds established by body corporates are discussed in Taxation Ruling TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation (TR 2015/3), which explains that a 'body corporate' is established by the proprietors (paragraph 2) under the strata legislation of the various states and territories.

Body corporates may impose levies on proprietors for special purpose funds to meet expenses common to all proprietors. Depending on the nature of the transactions, and weighing a range of factors, these levies may amount to 'mutual receipts'. Relevant factors include:

•                the relationship between a special levy amount and the common fund.

•                the purpose for which the payment is made - i.e. whether the payment is to meet the member's proportion of their mutual liabilities.

•                the capacity in which an amount is paid - i.e. whether the member is dealing with the strata title body in their role as a member (TR 2015/3, paragraph 25).

As set out in the Facts, you received and paid notices of contribution (notices) from the Body Corporate that detailed special levies, invoice numbers, and due dates. The special levies are 'mutual receipts' (refer paragraph 24 of TR 2015/13) that are held by the Body Corporate for the common benefit of all the proprietors (refer paragraph 67) to undertake the Works.

The special levies are not 'incurred' on receipt or payment of the notices as you are not definitively committed to debts at that time. There is only an 'expectation' of debts to be paid in the future - when expenses are incurred for the Works. The special levies are an estimate of the contribution in respect of Apartment X, to the 'expected' mutual liabilities for the Works, the mutual Works expenses (refer TR 2015/13, paragraph 67).

The special levy fund was used progressively to pay for the Works, which have now been completed.

Are the works expenses incurred to date 'for repairs' to property or capital in nature?

TR 97/23 provides the Commissioners view regarding circumstances in which expenditure is deductible under section 25-10.

Legal and other expenses

Legal and other expenses are generally deductible under section 8-1 of the ITAA 1997 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.

Door, window, and balcony works.

The balcony refurbishment works are being undertaken to repair damage and deterioration to the balcony and facilitate the repair of the door-set assemblies. Rectification works for the door-set assemblies, bedroom windows and balconies are 'for repairs' for the purpose of section 25-10 of the ITAA 1997.

Are the door, window, and balcony repair works 'capital in nature'?

In relation to whether the door, window and balcony works are 'initial repairs', although it is likely the doors, windows and balconies have been deteriorating over time and that some deterioration existed when you acquired the apartment, it was in good working order and suitable for use for income producing purposes when it was acquired. Apartment X has been used to produce income since acquisition in 20XX and through to the completion of works, less a X week period due to access issues.

Applying paragraphs 59 to 66 and 125 to 140 of TR 97/23, the door, window, and balcony works are not 'initial repairs.

In relation to whether the door, window and balcony works are the reconstruction of 'entireties', the doors, windows, and balconies:

•                are not separately identifiable as principal items of capital equipment.

•                are not capable of providing a useful function without regard to other parts of the apartments.

Applying paragraphs 37 to 42 of TR 97/23, the door, window, and balcony works are not renewal or reconstruction of entireties.

In relation to whether the door, window and balcony works are "improvements", although new and different materials and technologies (the new elements) are being used:

•                the new elements replace old materials and technology that are no longer used or available and are 'like for like' products to those being removed.

•                at the time of acquisition, the doors, windows, and balconies of the apartment were functioning efficiently. The works are returning them to the previous efficiency of function and any improvement is only minor and incidental,

•                the new elements do not change the character of the doors, windows and balconies, or the apartments as a whole,

•                the door, window and balcony works do not produce a new and different, or additional, function for the apartments,

•                the door, window and balcony works do not bring the apartment into a more valuable form, state, or condition; or significantly enhance the apartment's saleability or market value; and any extension of the apartment's life is considered to be minor.

Applying paragraphs 44 to 54 of TR 97/23, the door, window and balcony works are not "improvements".

As such, the door, window and balcony works are 'for repairs' that are not capital in nature.

The Internal works

The Works contract includes rectifying damage to tiles, mirrors, floors, benchtops, cupboard doors and other items inside the apartments' work zones caused by the water leakage through the doors and windows.

In certain apartments, additional works (Additional Works) may be undertaken that were not caused by water leakage from the doors and windows. In these cases, the respective apartment owner pays for these works separately, in addition to the special levies.

As the expenses for the Additional works are not paid using the special levies, they are not 'mutual Works expenses' and are not included in calculating any deduction that may be available in relation to the special levies.

The internal works (excluding any Additional Works) are 'for repairs' that are not capital in nature.

Air conditioner units works

The Works contract includes removing and replacing air conditioning units and related ducting to facilitate the door, window and balcony works; including rectifying damage to the external walls and paintwork.

Predominantly, the existing air conditioner units are being recommissioned and reinstalled. However, in certain apartments where air conditioning units are not suitable for recommissioning and reinstallation, additional works (also Additional Works) may be undertaken and where the apartment owner is given the option to install a new air conditioning unit. In these cases, the respective apartment owner pays for the new air conditioning unit (and other parts) separately, in addition to the special levies. As discussed above, as the expenses for the Additional works are not paid using the special levies, they are not 'mutual Works expenses' and are not part of any deduction that may be available in relation to the special levies.

Recommissioning of the existing units is maintenance. However, applying TR 97/23 paragraphs 6, 14 and 19, as this maintenance is being done in conjunction with repairs, it does not cause the Works to cease being 'for repairs'.

The Air Conditioning Unit works (excluding any Additional Works) are 'for repairs' that are not capital in nature.

Deposit and access

Given the height of the building, secure external access is required to undertake the door, window and balcony works and transport materials. The deposit, an initial payment for the Works, and the access costs, being directly for the purpose of the Works, have the same character as the door, window and balcony works and are 'for repairs' that are not capital in nature.

Works expenses

Based on the above, the XX Works expenses (excluding expenses for any Additional Works, new air conditioning units or related parts, which respective owners pay for separately, in addition to the special levies) are 'mutual Works expenses'.

The mutual Works expenses billed by XX Expenses are 'for repairs' and are not capital in nature.

Other expenses incurred

Other expenses were incurred for tiles, project management and engineering advice that were directly required for the XX repair works. Further, legal fees were incurred to review the Works contract.

These expenses can be characterised with reference to the purpose for which they were incurred. As these expenses were incurred for the purpose of the Works they are similarly characterised and are 'for repairs' and not capital in nature.

Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition

Initial repairs

Section 25-10 of the ITAA 1997states:

25-10(1): You can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

25-10(2): If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances.

25-10(3): You cannot deduct capital expenditure under this section.

As explained in paragraphs 59 to 60 and 125 to 134 of TR 97/23, initial repairs are capital expenditure and are not deductible under section 25-10 of the ITAA 1997.

Section 8-1 of the ITAA 1997allows a deduction for losses or outgoings incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not allowed under section 8-1 to the extent that the loss or outgoing is of a capital nature.

The words 'to the extent that' indicate that an expense may be apportioned if it is partly deductible and partly non-deductible: Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; 4 AITR 236 (Ronpibon); Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100; (1981) 11 ATR 484. However, as explained in Ronpibon, where apportionment is necessary, the method adopted must be 'fair and reasonable' in all the circumstances.

In respect of apportionment of initial repair costs, paragraphs 138 to 140 of TR 97/23 state:

138. Initial repair expenses can be dissected or apportioned under section 25-10 to allow a deduction to the extent to which the repair work remedies defects, damage or deterioration arising from the taxpayer's holding, etc., of the property for income purposes after it is acquired: see the Law Shipping case where the Special Commissioners allowed a deduction of £pound;12,000 (out of a sum of £pound;51,558 incurred on repairs) as being applicable to the period during which the company owned the ship. See also (1962) 10 CTBR (NS) Case 84; (1963) 11 CTBR (NS) Case 63; (1950) 1 CTBR (NS) Case 18 and (1959) 8 CTBR (NS)Case 137 in which purchased properties were repaired and Taxation Boards of Review allowed a portion of repair expenditure; contrast the views of Senior Member, Mr PM Roach, in Case V167 88 ATC 1107; AAT Case 12 (1986) 18 ATR 3056 and Case W7 89 ATC 161; AAT Case 4845 (1988) 20 ATR 3170

We accept that Windeyer J in the Thomas case (at 115 CLR 74; 14 ATD 88) was saying nothing more than that there was insufficient evidence in relation to the items of expenditure he was considering in that particular case to permit him a basis of apportionment. Windeyer J was not saying categorically that apportionment is never possible. This approach is also suggested by his Honour citing with approval the decision in the Law Shipping case.

140. We accept, for example, that a court might agree to apportionment if a taxpayer is able to identify the extent to which repair expenditure is necessitated by deterioration arising after property is acquired and is attributable to the taxpayer's holding, etc., of the property for income purposes.

Although Ronpibon was dealing with section 8-1 of the ITAA 1997, costs under section 25-10 are also capable of being apportioned in a similar way to account for capital costs under section 8-1, and the requirement under section 8-1 that any apportionment be fair and reasonable would equally apply when apportioning initial repair costs under section 25-10.

An apportionment methodology that is acceptable to the Commissioner is detailed in paragraph 64 of TR 97/23:

64. Dissection or apportionment on a time basis is appropriate if repair costs are incurred either due to defects (whether expected or unexpected) that arise gradually over an extended period or due to wear and tear or deterioration that occurs:

(a) in part before the property is acquired by a taxpayer; and

(b) in part in the course of the taxpayer's holding, etc., of the property for income purposes.

Application to your circumstances

In your case, you acquired the property in MM 20XX. As noted in the Facts, the complex was constructed circa 19XX with damage first identified in a report obtained by the Body Corporate in MM 20XX. Between 20XX and 20XX, further reports were obtained by the Body Corporate resulting in an XX in MM 20XX. Rectification works did not commence until late 20XX and were completed by MM 20XX.

We accept that Works outlined in the reports and completed were undertaken to restore the efficiency and function of the Apartment Complex and did not change its character. The Works are therefore correctly characterised as 'repairs'. This conclusion is consistent with the approach adopted by the Commissioner in consideration of other taxpayers who are also lot holders in the Apartment complex.

In your case, you did not acquire the property until 20XX, by which time damage had been identified and therefore existed prior to your acquisition of Apartment X.

We consider apportioning the expenses using the date of construction as a start date to calculate the apportionment of initial costs would be an overly conservative approach to applying the time-based methodology contained in paragraph 64 of TR 97/23.

MM 20XX is offered by you as the commencement date because this is the date that damage was first identified by the Body Corporate. For this date to be used, the Commissioner must be satisfied that it is fair and reasonable in the circumstances of this case.

We accept that a portion of the repair costs relate to damage that may have occurred since you acquired Apartment X in 20XX and further that the defects may have matured during that time between the date of acquisition in MM 20XX and the completion of the works in MM 20XX. We therefore accept that apportionment on a time basis is appropriate using MM 20XX as the relevant commencement date for apportioning initial repair costs instead of construction date or some other arbitrary date.

In conclusion, the works undertaken at least partially relate to initial repairs and are capital in nature and are not deductible under section 25-10 of the ITAA. However, rectification of any issues that arose after you acquired the unit are non-capital repairs and deductible under section 25-10.

Proposed calculation:

•                Total days X

•                Total amount of levy $X

•                Pre-acquisition days X

•                Post acquisition days X

This would result in approximately X % of the costs being treated as initial repairs and capital expenditure excluded from deductibility under subsection 25-10(3) of the ITAA 1997, and approximately X % of costs being the amount deductible under section 25-10 of the ITAA 1997 In other words, of the total amount of $X, approximately $ X incurred would be deductible under section 25-10, and the balance would be a capital expense that is excluded under subsection 25-10(3).

In conclusion, the works undertaken at least partially relate to initial repairs and are capital in nature and are not deductible under section 25-10 of the ITAA. However, rectification of any issues that arose after you acquired Apartment X are non-capital repairs and deductible under section 25-10 of the ITAA 1997.