Private ruling: Rental deductions and repairs
Date of advice: 29 July 2024
Published: 9 September 2024
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim a deduction in the income year ended 30 June 20XX 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 your rental property? | A1: No. | Q2: Can you deduct the portion of the special levy paid to the body corporate for initial repairs to your rental property as a capital works deduction at the rate of 2.5% per income year? | A2: Yes. | Q3: Can you deduct the portion of the special levy paid to the body corporate for repairs to your rental property that are not initial repairs under section 25-10 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: You purchased an investment unit at XX XX XX, XX, XX in XX 20XX (the property). The property was rented from XX XX 20XX. The property was built in c. 1973. You were advised at the time of purchase by the vendor's real estate agent that the property required remedial work to the balconies in the complex. You were not provided a report on the works at the time of purchase. The remediation work on the balconies is expected to commence in XX 20XX, and is expected take 36 weeks to complete. XX XX on behalf of the XX XX XX engaged engineers to report on the scope of works for the proposed remediation to the balconies on the complex. The remedial work includes: • re-waterproofing of balconies (including removal of floor finishes, screeding, waterproofing, tiling and replacement of sliding doors) • replacement of balustrades • cavity flashing works • improvement of balcony and courtyard drainage by installing new stormwater drainage. The scope of work does not include any hidden defects such as slab broken service pipes, water ingress or latent conditions. The remediation works are to be funded by a special levy initiated by the XX XX. The tender has selected XX to undertake the remedial works. On XX XX 20XX you paid an amount of $XXX to the special levy fund of the XX XX for the repairs. A certificate of compliance is not required on completion of the repairs. You continue to rent the property.

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 43

Reasons for decision: Summary: 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. Under section 8-1 of the ITAA 1997 body corporate fees and charges may be claimed as a deduction for rental properties. 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 payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time they are incurred. However, if you are required by the body corporate to pay a special levy to pay for a particular capital expenditure, these levies are not deductible. This is the case whether that special levy is paid into a special purpose fund or as a special contribution to a general purpose sinking fund. | 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. 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. However, a deduction is not allowable if the expenditure is of a capital nature, for example, an initial repair. Taxation Ruling TR 97/23 Income tax: deductions for repairs (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. Repair involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. | Detailed Reasoning - Initial repairs: An initial repair refers to a repair by a taxpayer that remedies some defect in property or makes good damage to, or deterioration of, property being a defect, damage or deterioration existing when the property was acquired, and not arising from the operations of the taxpayer who incurs the repair expenditure (see paragraphs 59 to 61 of TR 97/23). An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit-yielding structure. It is capital expenditure and is not deductible under section 25-10 of the ITAA 1997. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition, but before the repair expenditure is incurred. An initial repair can be apportioned to allow a deduction under 25-10 of the ITAA 1997 of any part of the expense that remedies deterioration arising from the holding of the property by a taxpayer for income purposes after it was acquired (see paragraphs 63 to 66 of TR 97/23). | Detailed Reasoning - Capital works deductions: Division 43 of the ITAA 1997 allows a deduction for capital works in relation to a structural improvement to a residential rental property where the structural improvement was constructed after 26 February 1992. The deduction can be claimed for 40 years from the date construction was completed. The rate of deduction per income year is 2.5%. Capital works also generally include improvements to buildings (subsection 43-20(1) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: In your case, the works done were undertaken to restore the efficiency and function of the property and did not change its character. The works are therefore correctly characterised as 'repairs'. Documentation you provided indicates that the repair works include the rectification of defects that existed prior to the time you acquired the unit. Consequently, the remediation works at least partially relate to initial repairs and are capital in nature. Therefore, the associated special purpose levy contribution is not a fully deductible expense under section 25-10 of the ITAA 1997. You can apportion the total expense to reflect the portion that represents capital expenditure that is an initial repair. This amount can be deducted as a capital works deduction. The work to fix the building defects that were in place prior to you acquiring the unit will be considered capital expenditure and not deductible under section 25-10. However, rectification of any issues that arose after you acquired the unit are non-capital repairs and deductible under section 25-10. The whole of the special levy may not be deductible in the financial year that it is paid by you to the body corporate if the expenditure on the building works is not all incurred in that year. If the body corporate is charged on completion of stages, the payments for those partial works are deductible as they are incurred, whether the expenditure from the special levy fund was a repair or capital expenditure.