Private ruling: Deductions - rental property expenses
Date of advice: 6 February 2025
Published: 17 March 2025
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim an immediate deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the proportion of the remedial works that relates to the cost of the replacement of the damaged balustrades for your unit, patching work done to your balcony, painting as well as scaffolding required to access the balcony? | A1: Yes. | Q2: Can you claim an immediate under section 25-10 of the ITAA 1997 for the proportion of the remedial works that relates to the cost of the waterproofing of your balcony? | A2: No. | Q3: Can you claim a capital works deduction at the rate of X % per year over X years for the proportion of the special levy that relates to the waterproofing of your balcony? | A3: Yes.

Relevant facts and circumstances: In 19XX, you purchased a unit (the unit). The unit is one of several in a unit complex. You have used the unit to earn assessable income since you acquired it, with the exception of a short period where it was vacant while works were being undertaken. On Date one, a consultant at Company A, an engineering consulting company, carried out an inspection of the units' balconies and provided a condition report to the Owners' Corporation. Units A,B and C are excluded from the works carried out. The report identified serious hazards to the balustrades of some of the unit balconies, including your unit. The majority of the balconies had hollow sounding areas, indicative of concrete spalling (known colloquially as concrete cancer). The likely cause of the concrete spalling was the unprotected concrete slab being exposed to the atmosphere for a prolonged period of time. On inspection, it appeared that the majority of the balcony slabs did not have any protective finishes such as a membrane or tiling. The consultant from Company A recommended that all the balcony slabs be repaired with a conventional patch repair methodology. This would involve localised breakout of drummy areas, removal of all rust from the reinforcement and treatment with a zinc rich primer. The demolished sections would then be reinstated with a suitable repair mortar. Based on Company A's tests, they estimated that a significant percentage of each balcony may need to be repaired in such a way. Company A also recommended that a suitable waterproof membrane be applied on the surface of the slab. In Company A's experience, a large proportion of the cost of these remedial works could be attributed to access (scaffolds) and as such Company A recommended that the concrete spalling and waterproofing works be undertaken at the same time as the balustrade replacement. The consultant who provided the report observed deflection to the balustrades of your balcony upon the application of slight to moderate pressure. In the consultant's opinion, the balustrades would not meet current required loading standards as nominated by the National Construction Code (NCC) and Australian standard AS1170.1. The consultant also advised that there is no retrospective requirement for existing structures to satisfy the current requirements of the NCC. The consultant advised the Owners' Corporation that nevertheless, they should be aware that recent legal precedents set in Australian courts mean that there is now a significant risk that an owners' corporation can be held liable for death or injury sustained to residents or visitors because of a barrier which is inadequate to prevent a fall from height. General condition of the balcony: • The balustrade is a composite system with steel frame members and wired glass infill. The balustrade has an approximate height of X00mm. • The balustrade is unstable and could be easily deflected with moderate hand pressure. • Significant sections of the balcony surface were drummy when hammer tested. • Estimates of around XX% of the balcony floor surface is drummy. • The base of the baluster has corroded and exposed steel reinforcement is corroding. • The concrete has cracked around the baluster post. Condition of unit X's balcony balustrade Unit X balcony balustrade presents a serious hazard to occupants and visitors. The balustrade could be easily deflected with slight to moderate hand pressure. In our opinion, the balustrade would not be able to meet the required loading standards. Recommendations regarding unit X Company A recommended that the balustrade be replaced as soon as practicable. In the interim, access to the balcony should be prohibited. Following the inspection, the consultant advised that access to your unit should be stopped and the balustrades replaced as soon as possible. On Date 2, the Owners' Corporation at the Annual General Meeting resolved a motion to raise a Special Levy. The Special Levy was raised for necessary remedial works to all common balconies. You were required to pay a share of the total levy. Company B was engaged to complete the required works. Scaffolding was installed to enable the works to be undertaken. The balustrades were demolished and replaced with an off-the-shelf aluminium system with glass infill panels. The balconies were repaired using a conventional patch repair methodology as described above. The balconies for the units (excluding Units A, B and C) and the ground floor entry awning were waterproofed with a trafficable liquid membrane. The works also included the replacement of the existing floor toppings. The following previously painted external elements of the building were coated with a flexible acrylic waterproofing membrane as required: • all balcony slab projections • all balcony slab edges up until the drip groove under. If there is no drip groove, the entire soffit of the balcony • any beams and columns disturbed by the works Areas disturbed by the works or the installation of access mechanisms for the works were repainted as necessary. Any newly rendered surfaces were coated with an acrylic, flexible weatherproofing and anti-carbonation membrane. Where the surface had been encapsulated with a façade membrane, the paint system was applied over it after the membrane has been cured. The works were commenced several years ago and were completed last year. The cost of the works exceeded the cost of the levy.

Relevant legislative provisions: Income Tax Assessment Act section 25-10 | Income Tax Assessment Act section 43-70 | Income Tax Assessment Act Division 43

Reasons for decision: Summary: The remedial work such as the patch work to the balcony, the replacement of the balustrades for your unit, the painting and the scaffolding required for access would be considered a repair. You can therefore claim an immediate deduction under section 25-10 of the ITAA 1997 for these expenses at the time when incurred. This timing will be in the income year, when the remedial works were actually undertaken and paid for by the body corporate. You will however need to apportion the total expenses incurred to account for those that constitute a genuine repair as shown above and those that represent a capital improvement such as the waterproofing that did not exist previously. Only those remedial works that constitute a repair will be immediately deductible. | Detailed Reasoning - Special levy: 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. | Detailed Reasoning - Repairs: Section 25-10 of the ITAA 1997 provides that 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, subsection 25-10(3) of the ITAA 1997 precludes a repair deduction if the expenditure is of a capital nature. The following are examples of expenses which are capital expenditure or of a capital nature: • replacement of an entire structure or unit of property (for example such as a complete fence or building, a stove, kitchen cupboards or refrigerator). • improvements, renovations, extensions and alterations; and • initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. TR 97/23 explains that 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. To repair property improves to some extents the condition it was in immediately before the repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10. It is necessary to consider whether the work done to property constitutes repairs by considering whether the work restores the efficiency of function of the property without changing its character. Repair is distinct from renewal or reconstruction; a repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety. Work done to part of a building, though not amounting to a replacement or reconstruction of an entirety may still be capital expenditure and not deductible, for example, because it amounts to an improvement. Paragraphs 44 to 57 of the TR 97/23 detail the distinction between a repair and an improvement. Paragraph 48 provides that if expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue. Paragraph 49 provides that whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant. Paragraph 50 provides that if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement. As outlined in Paragraph 51,the test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10 of the ITAA 1997. | Detailed Reasoning - Apportionment: Paragraph 55 to 57 of TR 97/23 covers repairs done at the same time as improvements. The character of a repair does not necessarily change because it is carried out at the same time as an improvement. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. If individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually affected from the capital cost of the improvements. | Detailed Reasoning - Application to your circumstances: In your case, the special purpose levy was used by the body corporate to undertake remedial works including the replacement of the balustrades, patch repair of the concrete balcony where required, painting, scaffolding, and waterproofing. | Detailed Reasoning - Balustrades replacement: The damaged balustrades for your unit were replaced as they were unsafe and not functioning effectively. As part of their tender report, Company A advised that all of the balustrades should be replaced to prevent legal action in the event of injuries from people falling from the balconies. The replacement of the damaged balustrades for your unit was not a replacement of an entirety and although the balustrades were replaced with more modern material, we consider the work done merely restores the efficiency of the previous function without changing its character. | Detailed Reasoning - Balcony patchwork: The balcony had work undertaken on them using a patch test methodology. This involved localised breakout of drummy areas, removal of all rust from the reinforcement and treatment with a zinc rich primer. The demolished sections were then reinstated with a suitable repair mortar. A percentage of each balcony needed to be repaired in such a way. The work undertaken on the balcony was done to restore the balcony so that they performed their intended function effectively. | Detailed Reasoning - Painting: The painting was done as part of the remedial works in order to rectify the existing deterioration and to prevent further deterioration. | Detailed Reasoning - Scaffolding: Scaffolding was required in order to access the balcony and undertake the remedial works repairs required. | Detailed Reasoning - Conclusion: The remedial work such as the patch work to the balcony, the replacement of the balustrades for your unit, the painting and the scaffolding required for access would be considered a repair. You can therefore claim an immediate deduction under section 25-10 of the ITAA 1997 for these expenses at the time when incurred. The timing will be in the income year, when the remedial works were actually completed and paid for funds held in the special levy. You will however need to apportion the total expenses incurred to account for those that constitute a genuine repair to your unit as shown above and those that represent a capital improvement such as the waterproofing that did not exist previously. Only those remedial works that constitute a repair to your unit will be immediately deductible. | Summary: You can't claim a deduction under section 25-10 of the ITAA 1997 for the proportion of the remedial work that relates to the cost of the waterproofing of the balcony as well as any other work not listed as a repair. | Detailed Reasoning - Detailed reasoning: Paragraph 96 of TR 97/23 provides that to constitute a 'repair' for the purposes of section 25-10 of the ITAA 1997, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in the ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section. Paragraph 99 of TR 97/23 provides that if government regulations require something to be added to a property, work done to comply with this requirement does not constitute a repair because it is not work done to remedy or make good any defect, damage or deterioration in a mechanical or physical sense. In any event, this is likely to involve capital expenditure and be excluded from section 25-10 of the ITAA 1997. An improvement provides greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable and desirable form, 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. | Detailed Reasoning - Application to your circumstances: Waterproofing works were undertaken to the balcony following patch repairs. The purpose of the waterproofing is to protect the concrete slab in the long term. The balcony was not waterproofed prior to the repairs so the waterproofing is not restoring a function that existed previously. The waterproofing has resulted in an improvement to the property as it will decrease the likelihood of deterioration of the balcony into the future. It will also extend the expected life of the balcony. Therefore, an immediate deduction is not available for the waterproofing of the balcony. | Summary: You can claim a deduction of X% over X years for the cost of the waterproofing of the balcony. | Detailed Reasoning - Detailed reasoning: Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works include buildings and structural improvements. Capital works also includes alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. The rate of deduction for capital works for a residential property is X% of the construction expenditure over 40 years. Expenditure from demolishing existing structures is excluded in accordance with paragraph 43-70 (2) (b) of the ITAA 1997. The deduction can be claimed for 40 years from the date construction is completed. The rate of deduction per income year is X% | Detailed Reasoning - Application to your circumstances: The balcony slab was repaired using as patching methodology. They were then waterproofed to prevent concrete spalling in the future. The waterproofing of the balcony constitutes a capital works deduction as it was done to prevent future damage and is not maintenance or repair work. The waterproofing did not exist previously to the remedial work being done and consequently was not a repair or replacement. You can claim a capital works deduction of X% over X years for the waterproofing.