Private ruling: Deductions - rental property repairs - body corporate special levies
Date of advice: 25 January 2024
Published: 11 March 2024
Ruling period: Income tax year ended 30 June 2022 | Income tax year ended 30 June 2023 | Income tax year ending 30 June 2024 | Income tax year ending 30 June 2025
Date scheme commenced: 1 July 20XX

Ruling: Q1: In each income year, pursuant to section 25-10, can the Partnership reduce its assessable income by a partial amount of the special levies paid to the Body Corporate for the works to the Apartment Complex? | A1: Yes.

Relevant facts and circumstances: Partner A and Partner B acquired apartment X in the apartment complex (Apartment Complex) in 20XX. Since acquisition, Partner A and Partner B have used the apartment to derive assessable income as partners in the partnership (Partnership). The Body Corporate for the Apartment Complex (Body Corporate) was registered in 19XX. Damage at the Apartment Complex The Apartment Complex has damage caused by water ingress through window and door assemblies. The damage was first detected in 20XX/XX. The Body Corporate engaged various consultants to investigate, assess the damage, and make recommendations. Works in respect of the damage (the Works) In 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: • Contractor A, and • Contractor B. The Contractor A progress claim worksheets apportion costs into the following categories: Deposit, Access, Windows Doors, Balcony Refurbishment, Internal works, and Air Con. As of 30 June 20XX, the Works were only around X% complete. It is estimated that the Works will be completed by MM/20XX. Access for the Works The Apartment Complex has XX levels. Access for the Works requires use of an XYZ 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, the members resolved that a special sinking fund contribution amounting to $X including GST be raised to fund the Body Corporate's obligations for the Works. The special levy is to be paid in X instalments. To date, the Partnership has received X notices of contribution (notices) from the Body Corporate detailing special levies of $X per notice. Each notice included the words 'Tax invoice', invoice numbers, and due dates. Works expenses Expenses were incurred in relation to the Works for: • a lawyer to review the Works contract • progressive claims for the Works • tiles • project management, and • engineering advice.

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

Reasons for decision: Summary: Under section 25-10, 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. | Detailed Reasoning - Which entity is 'You' for the purposes of section 25-10?: For the purposes of section 25-10, 'you' refers to the entity that holds and uses the property for producing income (TR 97/23, paragraphs 67 and 68). For income tax purposes: • an "entity" includes both an individual (paragraph 960-100(1)(a)) and a partnership (960-100(1)(b)); and • a "partnership" includes an association of persons in receipt of ordinary income or statutory income jointly (other than a company or a limited partnership) (subsection 995-1 of the ITAA 1997 and subsection 6(1) of the Income Tax Assessment Act1936 ). As the Partnership uses the apartment to produce assessable income, the Partnership is 'You' for the purposes of section 25-10. | Detailed Reasoning - Partnerships and allowable deductions: A partnership does not itself pay tax (except for a corporate limited partnership). Instead, the partners must divide the partnership net income (or loss) according to any partnership agreement, or if no agreement exists, between the partners equally ( Rental properties 2023 (NAT 1729-06.2023), page 4). In relation to a partnership, 'Net income' means the assessable income of the partnership (calculated as if the partnership were an Australian resident taxpayer) less allowable deductions (except deductions under section 290-150 or Division 36). | Detailed Reasoning - 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 - ie whether the payment is to meet the member's proportion of their mutual liabilities. • the capacity in which an amount is paid - ie 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, the Partnership received and paid notices of contribution (notices) from the Body Corporate that detailed special levies, invoice numbers, and due dates and will receive similar notices in the future. 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 the Partnership is 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 the apartment, to the 'expected' mutual liabilities for the Works, the mutual Works expenses (refer TR 2015/13, paragraph 67). The special levy fund is being used progressively to pay for the Works, which are not expected to be completed until 20XX. As of 30 June 20XX, the Works were only around X% complete. Consequently, the Partnership cannot deduct the full amount of the special levies struck by the Body Corporate based on the notices received or paid each year and will only become entitled to a deduction under section 25-10: • in respect of the mutual Works expenses paid using the special purpose fund, • once the mutual Works expenses have been 'incurred', • to the extent of the special levies that the Partnership has paid and has not previously deducted, and • if the requirements in section 25-10 are satisfied. | Detailed Reasoning - Are the Works expenses incurred to date 'for repairs' to property or capital in nature?: Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides the Commissioners view regarding circumstances in which expenditure is deductible under section 25-10. | Detailed Reasoning - Legal and other expenses: Legal and other expenses are generally deductible under section 8-1 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. As set out in the facts, the special levies are being held by the Body Corporate to pay debts incurred, and yet to be incurred, for carrying out the Works. | Detailed Reasoning - Were the Contractor A Progressive Claim expenses 'for repairs': Contractor A apportioned its costs into the following categories: 'Deposit', 'Access', 'Windows Doors', 'Balcony Refurbishment', 'Internal works', and 'Air Con'. Each category is considered below. | Detailed Reasoning - Door, window and balcony works: The balcony door-set assemblies showed significant damage and deterioration requiring repair. The bedroom windows also required repair as they showed similar water ingress damage, although windows Bedroom 2 to a lesser extent. 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. | Detailed Reasoning - Are the door, window and balcony repair works 'capital in nature'?: In relation to whether the door, window and balcony worksare 'initial repairs', although it is likely that the doors, windows and balconies have been deteriorating over time and that some deterioration existed when Partner A and Partner B acquired apartment X it was in good working order and suitable for use for income producing purposes when it was acquired, and it has been used to produce income for more than XX years since acquisition. Applying paragraphs 59 to 66 and 125 to 140 of TR 97/23, the door, window and balcony worksare 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 • are not separate or distinct items of plant • are not a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law • are physically, commercially, and functionally an inseparable part 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 apartment X 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 apartment X 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. | Detailed Reasoning - 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. | Detailed Reasoning - 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. | Detailed Reasoning - 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. | Detailed Reasoning - Conclusion as to the Contractor A expenses: Based on the above, the Contractor A 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 Contractor A are 'for repairs' and are not capital in nature. | Detailed Reasoning - Other expenses incurred: Other expenses were incurred for tiles, project management and engineering advice that were directly required for the 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. | Detailed Reasoning - Future expenses: Similar expenses to those already discussed were incurred for the Works between 1 July 20XX and October 20XX. Each of these expense types have been considered (above) to be 'for repairs' for the purpose of section 25-10 and not capital in nature. Provided future expenses, yet to be incurred, are in respect of contractors or providers considered in this ruling and are incurred for the Works, they will be 'for repairs' for the purpose of section 25-10 and not capital in nature. Where, in the future, additional payments are made by owners in respect of Additional Works, the expenses for the Additional Works are not 'mutual Works expenses' and are excluded in calculating any deduction in respect of the special levies. | Detailed Reasoning - Conclusion as to the Partnerships entitlement to reduce its assessable income by an amount of the special levies under section 25-10: When the special levy notices are received or paid, the Partnership does not incur debts to which it is completely subjected as the special levies are contributions to the special fund to pay for the 'expected' mutual Works expenses. As such, no allowable deductions arise at the time of receipt or payment of the notices. The mutual Works expenses incurred to date are 'for repairs' that are not capital in nature. The 'mutual Works expenses' do not include any expenses incurred for additional internal works, new air conditioning units, or other parts or works that are not included in the Contractor A primary works contract, and that are paid for separately by individual apartment owners, in addition to the special levies. As the mutual Works expenses are being incurred progressively, at the time the expenses are incurred, allowable deductions in respect of the expenses will arise to the Partnership in amounts proportionate with the share of the total special levies payable in respect of the apartment, to the special levy fund (limited by the amount of special levies paid by the Partnership, less any amounts previously deducted).