Private ruling: Rental deductions
Date of advice: 25 February 2020
Published: April 2020
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the payment of $X for water charges on behalf of the Strata Corporation fully deductible? | A1: No.

Relevant facts and circumstances: There is a dispute between the Strata Corporation and the local council regarding the outstanding payment of water rates for $X. As a result of the dispute, on a morning of mid 20XX the council cut off the water supply to the residents of the strata, which included a tenant occupying your investment property. You were advised by a council officer that the water supply would not be restored until payment was received. As an appeal process would take time and you wanted to restore water to the tenant in order meet your contractual obligations with them, you paid the debt required by the council to reconnect the water supply, which occurred that afternoon. You were subsequently advised by the Strata Corporation that they would not repay the money to you on the basis that you were not authorised to make the payment on behalf the Strata Corporation.

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

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 in nature. Accordingly, to be able to claim expenses that relate to the property you must have held the property for the purpose of gaining or producing assessable income, and those expenses must not be of a private or domestic nature. Taxation Ruling TR 2015/3 Income Tax: matters relating to strata title bodies constituted under strata title legislation , states at paragraph 39: How 'income from common property, is assessed and which entity is entitled to deductions in respect of common property depends on whether the common property is owned by the strata title body as a trustee or by the proprietors. Where legal title to the common property is owned by the strata title body as trustee, the eligibility for deductions is determined by reference to the trustee's use of the property. The income and deductions form part of 'net income' which is then assessed in accordance with Division 6 of the ITAA 1936. Where legal and beneficial title to the common property is owned by the proprietors, the proprietors return the income and claim any deductions. | Detailed Reasoning - Conclusion: In your case, the expense for water charges relates in part to the assessable income derived from your investment property and in part as an expense to the strata title as a whole. You cannot claim the $X in full as you can only clam that proportion which relates to the water charges for the investment property rather than the whole amount which is incurred, in part, by each member of the strata title. The amounts incurred by the other members of the strata have no correlation to your investment property and its income producing activity and are therefore not an allowable deduction.