Private ruling: Special levy
Date of advice: 12 March 2026
Published: 4 May 2026
Ruling period: Period ended DD MM YY
Date scheme commenced: DD MM YY

Ruling: Q1: Can you claim an immediate deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the levy you have paid to the body corporate for your investment unit at Address A, as a repayment for remedial works on waterproofing and passive fire works in the complex? | A1: No.

Relevant facts and circumstances: On DD MM YY you entered into a contract of purchase for Unit A, Address A. Settlement for the unit took place on DD MM YY. This is your principal place of residence. The unit is part of a strata title complex operated by a body corporate which comprises X units in total. You are on the strata committee known as the Owners Corporation (OC) for the complex. In YY failures in the waterproofing were identified in all the common areas of the unit complex, external common walls and some unit balconies. Building cracks were being caused by water ingress. Also in YY, inspections were carried out by passive fire protection experts. These identified deficiencies in the passive fire protection measures that didn't meet the standards required by the Occupancy Certificate and Annual Fire Safety Statement (AFSS). Work was necessary to ensure compliance. In MM YY Consultant Firm A provided the OC with a Tender Document for Residential Remedial Building works. This outlined the following: • The structural elements of the building comprises reinforced concrete floor slabs supported by reinforced concrete support columns. • The façade is a combination of face brickwork, painted and rendered masonry, and powder-coated windows, doors, louvre panels and balcony balustrades. • There are multiple flat reinforced concrete roofs which have been constructed with falls towards various surface drainage outlets which then discharge into masonry mounted downpipes below. • The purpose of the project was to resolve water penetration issues affecting both internal and external building elements throughout the complex. • There were X units nominated to be re-waterproofed and tiled and these were identified. • The work involved demolishing the existing screed and surface coating throughout the balconies to expose the concrete substrate prior to the installation of new waterproofing membrane. The balconies would then be re-tiled. • Repairs were required to some cracking in concreate balcony slabs which involved the use of a concrete repair epoxy. • Stormwater drainage pipes needed to be cleared of all blockages and inspected to ensure they were correctly connected and not leaking. • New concrete plinths were required around some downpipes to achieve suitable upward membrane termination. This meant removal of existing balcony tiles and preparation of balcony floor surfaces prior to pouring and constructing the plinths. • New concrete plinths were required around the base of pergola posts. • Aluminium framed doors and windows that adjoined the balconies needed to be temporarily removed in order to allow the installation of the new waterproofing membrane. • Replacement of all cavity flashings would take place in all cavity walls surrounding the balconies to be waterproofed. Additional locations for new cavity flashing to be installed were in X units, all identified. • The existing liquid coating waterproofing in common roof area needed replacing. • Many of the existing rendered elements throughout the building required repair. • Various sections of external brickwork had cracked as a result of normal building movement and required repair. • New paintwork was required on multiple surfaces throughout the complex, some that undergone repair and some that had not such as planter boxes. • Other nonpainted surfaces such as brickwork had sustained efflorescence (a naturally occurring mineral salt staining) and required a soft wash to clean them and the application of a clear water repellent. • The ensuite bathrooms of X units had sustained damage due to waterproofing and required full re-waterproofing and refurbishment. • Flood testing was required in other bathrooms in X units. The courtyard or balcony of X units also required flood testing. • Damaged downpipes and rainwater heads were required in some areas of the complex. On DD MM YY Consultant Firm A provided the OC with a Tender Addendum that removed the need for rooftop waterproofing and included a soft wash of the building's rooftops. On DD MM YY Consultant Firm A sent an email to delegates of the OC with two tender submissions from Business A and Business B. The Business A tender was for $X, while Business B quoted $X for the works. Both quotes included GST and an HBCF insurance estimate On DD MM YY an Extraordinary General Meeting (EGM) of the OC was held to in respect of the project. At this meeting it was resolved: • To approve a tender by Business A for the major works with an expected cost (including a X% contingency) of $X. • To fund the remediation works via an initial loan from Lending Firm A for the amount of $X. • Once the remediation works were completed, to refinance this initial loan contract with a hybrid loan from Lending Firm A. This was to be for the amount borrowed, less the amount any self-funding owners (SFO) wished to contribute to the total amount borrowed (detailed and managed under an SFO Agreement). A Working Capital Facility contract was to be established with Lending Firm A in an amount up to $X for the purpose of covering any cash shortfalls arising from non-payment of loan repayment levies. • For the OC to raise sufficient levy contributions each year to meet expected loan repayments due under the initial lending contract, the subsequent lending contract, the SFO Agreement, and the Working Capital Facility Contract to ensure the OC's obligations in respect of these are met. You opted to be a self-funded owner in respect of the project levy. On DD MM YY Business C provided an assessment report to the OC on their inspection of the fire safety measures at the unit complex to assess that they could reliably perform to meet the approved design of this particular building. The report identified a number of issues with some identified as defects or damage and some, including no installed fire dampers, were considered to be non-compliance concerns. Several units could not be inspected due to lack of access. On DD MM YY Business C provided another assessment report to the OC. This identified a number of compliance issues with fire safety measures installed at the time of the building's construction in YY. The OC engaged a specialist consultant, to tender for the passive fire measures project and they provided a quote of $ with some variations allowed for different options with or without sprinklers or pumps. In MM YY the remedial works for the waterproofing defects commenced and were completed in MM YY. On DD MM YY an Annual General Meeting (AGM) of the OC was held. It was resolved at this meeting: • That the OC approve the estimated costs for the passive fire works. • To approve and enter into the initial loan with Lending Firm A for the increased amount of $X. • That any SFO's could choose to contribute to the amount borrowed, as consistent with the resolution made at the EGM DD MM YY. • To apply for the subsequent loan as per the resolution at the EGM DD MM YY. • To establish the Working Capital Facility contract as per the EGM DD MM YY with an increased amount of up to $X. On DD MM YY OC committee member Person A presented a status report for the works project. This detailed that the works were expected to be completed within budget. In MM YY the passive fire remedial works commenced and were completed in MM YY. On DD MM YY Person A presented another status report for the works project. This detailed: • The increased initial loan amount. • It advised the original completion date for the waterproofing works was MM YY. Works had progressed well but some challenges and weather delays meant a new forecast completion date of MM YY. • A contract had been signed with Business D for the passive fire system works at a cost of $X (including GST). • That once these works were complete, Business D would need to sign these off compliant with Australian Standards and current legislation. • That since commencing the works, additional issues not visible in the initial inspections had been identified that would mean an estimated increase of $X in costs as well as an increase in costs for the project managers. • These increases lead to the recommendation that the initial loan be increased by $X from $X to $X. On DD MM YY a general meeting of the OC was held. It was resolved to increase the initial loan to $X as advised in the status report of DD MM YY. Other resolutions were consistent with the AGM of DD MM YY. On DD MM YY you entered into a contract to purchase Unit B at the complex at Address A. Settlement was on DD MM YY. You purchased this unit as an investment property. You did not get a building inspection completed prior to purchasing the unit. As an existing unit owner in the complex, you were already aware of the waterproofing and passive fire protection issues and you knew of the condition of unit B specifically from an inspection with the owner. Unit B has been continuously tenanted since you purchased it. You claim deductions against the rental income that you receive from this. On DD MM YY Person A presented another status report to the OC for the works. This detailed: • This advised that Business A had now completed the waterproofing works and Consultant Firm A had issued a certificate of Practical Completion as at DD MM YY. The contract amount ended up being $X over budget. • An initial contract for the passive fire works had been signed with Business D for $X. • A second contract had been signed in MM YY with Contactors A for $X (excluding GST and HBCF insurance). • In MM YY Business D went into liquidation and were unable to complete their work. Most of the original work had been completed and only variation works remained which were then transferred to Contractors A. • These works were expected to be completed in MM YY. On DD MM YY you received the call notice from Lending Firm A in respect of your payment obligations under the SFO Agreement to pay your self-funded levy amount of $X by DD MM YY. On DD MM YY you transferred the amount from your bank account. On DD MM YY you received a receipt for the amount in respect of the SFO Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10(3) | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 43-20 | Income Tax Assessment Act 1997 section 43-70

Reasons for decision: Summary: The levy you have paid is a repayment to the body corporate for remedial works to the waterproofing in the complex and for repairs to the passive fire protection system in the building. These issues were in existence at the time you acquired Unit B in the complex, and as a member of the Organising Committee for the complex, you were aware of them prior to purchasing the unit. As such the repairs are considered to be 'initial repairs' in that the defects were part of the appearance, form, state and condition of the property and it's functional efficiency at the time you acquired it. They did not occur as a result of leasing the property under your ownership. The expenditure to remedy these defects is considered to be capital and non-deductible. | Detailed Reasoning - Special levy: Under section 25-10 of the ITAA 1997, 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. Are the Works expenses incurred 'for repairs' to property or capital in nature? TR 97/23 provides the Commissioners view regarding circumstances in which expenditure is deductible under section 25-10. | Detailed Reasoning - Deductions for repairs: Section 25-10 of the 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. The following are examples of expenses which are capital or of a capital nature: • replacement of an entire structure or apartment of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator) • improvements, renovations, extensions and alterations, and • initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which deductions for repairs are allowable under section 25-10 of the ITAA 1997. TR 97/23 states that in its context in section 25-10 of the ITAA 1997, the word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. 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. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. Expenditure to remedy defects, damage, or deterioration in existence at the date of acquisition | Detailed Reasoning - Initial repair: Paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after a rental property is acquired, where the expenses are 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 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. Paragraph 60 of TR 97/23 states that 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: • existed at the time of acquisition of the property; and • did not arise from the operations of the person who incurs the expenditure. It is not considered material whether you were aware of the condition or the need for repair of the property at the time of purchase. Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you acquired. 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. They are classified as capital expenditure because the damage or defects they fix was not incurred in renting the property out. Instead of being immediately deductible, these costs are added to the property's cost base to reduce capital gains tax upon sale. They are essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. | Detailed Reasoning - Application to your circumstances: In your case, you acquired the property in MM YY, by which time the waterproofing defects had been identified and remediation work undertaken and completed. As such the defects or damage existed prior to your acquisition of Unit B. The issue with the passive fire protection measures in the complex were also identified before your acquisition of the investment unit. Works on these began prior to you purchasing the unit and were completed X months post-acquisition. Additionally, some of the passive fire works were to install protective measures that had never been installed when the complex was constructed. The fact that they were required in order to comply with government regulations, does not detract that they are not a repair and are capital in nature. As the defects and damage were in existence at the time you purchased the unit, they are initial repairs and are therefore a capital expense. Consequently, the special levy you have paid as a self-funded owner to cover these costs is not deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Capital works: Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to building and structural improvements where a residential property is used for income producing purposes pursuant to section 43-20 of the ITAA 1997. The rate of deduction for capital works for a residential property is 2.5% of the construction expenditure over 40 years. Expenditure from demolishing existing structures is excluded in accordance with paragraph 43-70 (2) (b) of the ITAA 1997. The deduction can be claimed for 40 years from the date construction is completed. The rate of deduction per income year is 2.5%