Private ruling: Deductions – rental property expenses – body corporate levies – replacing roof
Date of advice: 18 January 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a deduction in your income tax return for body corporate levies for the cost of replacing the roof of an apartment block with different materials? | A1: No.

Relevant facts and circumstances: The property is made up of common and private ownership. You owned a unit at the property. You were required to pay body corporate levies to the Owners Corporation. The original roof of the property was concrete tiles (original roof). You voted to replace the original roof and add extra features. During the year in question the original roof was replaced and additional features were added to the roofing structure. The total cost of the works was approximately $XXX,XXX. During the year in question the owners of the units at the property paid a total of $XXX,XXX in levies to the Owners Corporation to replace the original roof and add extra features. In the year in question you were required to pay $XX,XXX in levies to the Owners Corporation to replace the original roof and add extra features. The remainder of the funds were already accumulated in a Sinking Fund. In the year after the roof was replaced you sold the unit you owned at the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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 to be payments for the provision of services by the body corporate and can be claimed as deduction for these levies at the time they are incurred. However, if the body corporate requires payments to be made to a special purpose fund to pay for particular capital expenditure, these levies are not deductible. Repairs Section 25-10 of the ITAA 1997 states expenditure incurred for repairs to any premises, or part of premises, held or used 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 improvement. Taxation Ruling 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. In your case, you were required to pay a body corporate levy for work undertaken on the building in which your rental unit was located. The work undertaken was to replace the roof and adding extra features. We consider the replacement of the concrete roofing tiles with colour bond sheeting in their entirety, the addition of insulation; gutter guards and a roof safety system will: ● provide a greater efficiency of function to the roof; and ● bringing the roof into a more valuable or desirable state or condition than a mere repair would do. Therefore, the replacement of the roof and adding extra features is considered capital in nature. As a result, you are not entitled to deduct your body corporate levies under section 25-10 of the ITAA 1997 for the 20XX financial year.