Private ruling: Rental expenses deductions
Date of advice: 25 October 2016
Published: February 2017
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for the levy charged by the body corporate to cover the cost of replacing your rental property's roof and support underpinning of the building as a repair? | A1: No.

Relevant facts and circumstances: You purchased a property in late 20XX with a settlement date of late 20XX. You rented the property as an investment property. You have since moved back into this property as your main residential address from mid 20XX. You have lodged relevant rental schedules declaring the income from the property. In April 20XX the body corporate held an annual general meeting (AGM) and voted to proceed with the repairs of the roof and underpinning of the building. In mid 20XX the body corporate of the building provided documentation to property owners that after extensive building assessments had been completed, it was confirmed the roof and underpinning of the building required to be repaired and replaced over a period of several months. The document in mid 20XX also advised property owners that the body corporate would receive a loan to fund the required building works and a special levy would be passed onto property owners expressly for the purpose of repaying this loan. The special levy for the loan repayment you are required to pay is included on your notice of contributions from the Body corporate every quarter. The building remained occupied while the repairs and replacement works were performed.

Relevant legislative provisions: Body Corporate and Community Management Act 1997 (Qld) | Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Initial repairs Taxation Ruling TR 97/23 explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. Although the word repair is not defined within the taxation legislation, paragraph 13 of TR 97/23 states that a repair means the remedying or making good of defects in, damage to, or deterioration of property. Paragraph 15 of TR 97/23 goes further to explain that a repair for the most part is occasional and partial. It 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. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 also states that expenditure to remedy defects, damage or deterioration in existence at the date of acquisition is constituted as initial repairs. | Detailed Reasoning - Initial repairs are of a capital nature and not deductible: 59. Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer. 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: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs. 60. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. 61. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes) [1972] 1 All ER 681 is not authority in Australia for a contrary view. 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. In your case, you acquired the property in late 20XX and the body corporate had identified the damage that required repairing prior to the AGM meeting held in April 20XX where the body corporate decided the repairs would go forward. As the date of the identification of the damage is before date of your acquisition these repairs would constitute as an initial repair and are not deductable as initial repairs are capital in nature.