Private ruling: Rental property
Date of advice: 25 February 2026
Published: 20 April 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: XX XXXXX 20XX

Ruling: Q1: Are the costs incurred for the Body Corporate Special Levies to cover the costs associated with water ingress deductible as repairs and maintenance under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Can you claim a capital works deduction for the Body Corporate Special Levies under Division 43 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: On XX XXXXX 20XX, you purchased the Property in a building of over XX levels and approximately XX apartments. You use this apartment to derive assessable income. The property has been tenanted and income producing. The property is managed by a real estate agent, at market rates and rented to unrelated parties. No building or pest control report was undertaken at time of purchase. The Apartment Complex has a registered Body Corporate Agent (Body Corporate). On XX XXXXX 20XX Company A provided the Body Corporate for the apartments with a preliminary report on water penetration issues for the apartments. The inspection was conducted on XX XXXXX 20XX. It was noted that several units were inspected and observed evidence of water penetration (considered as moderate to severe) at the sliding door threshold of each of these units. On the basis of this single inspection of several units (over XX rooms) it is not statistically feasible to comment on the full extent of the issue of water penetration throughout the unit complex. Company A were provided with a survey conducted in XXXXX 20XX by Company B. The document indicates that over XX% of the rooms of the Unit Block display evidence of water leaks and over XX% of the rooms of the Unit Block display evidence of drummy tiles to the threshold tiles. The values indicate severe and significant evidence of a failure of the door threshold waterproofing and tile construction. The problem of water leaks and drummy tiles from this evidence is clearly widespread. Building Remediation Project, frequently asked questions. In response to the questions raised about the new balcony doors and windows and replacement: The original building design did not include properly waterproofed hobs underneath the balcony doors and windows. ... To remedy this, we need to remove each door and window assembly and install a properly engineered and steel-reinforced waterproof hob on the underlying floor slab. The building will not be secure against future rainwater ingress and damage until we properly waterproof every unit and bring it up to standard. Although you may not currently see any water damage in your unit, a previous owner may have repaired it. Such repairs of course, do not address the underlying problem. A survey of units in the holiday letting pool back in 20XX revealed present or past water damage in most of the units inspected. The Body Corporate engaged various consultants to investigate, assess the damage and make recommendations. Over time the damage affected more apartments in the complex, including yours. You advised that the water damage was not visible or evident in your unit in the information provided to support your application. You have provided photos, as part of your ruling application, of the works you completed after the purchase which included the replacement of existing carpet with floorboards. From 20XX to 20XX, the Body Corporate followed a formal process of: • physical inspection • meetings • advising and voting on action required • determining contractors and types of contractors to be engaged • determining the ultimate cost for unit holders and, • voting for the works to be carried out by majority vote • research and discussions were undertaken to determine the best way to undertake the remediation works over a period of time. On XX XXXXX 20XX, the first "Sinking Fund - Special levy" request for payment after the investigative report received XX XXXXX 20XX from Company A. An Extraordinary General Meeting (EGM) of the Body Corporate was held where a majority of the members in attendance resolved to enter the following contracts to repair the damage: • XX XXXXX 20XX, (Contractor A) • XX XXXXX 20XX, (Contractor B). Contractor A progress claim worksheets apportion their costs into the following categories: • deposit • access • window, doors, balcony refurbishment • internal works and • air conditioning. Door and window works were undertaken to all doors and windows in the Apartment Complex. The work involved: • removing existing doors and windows, these could not be reinstalled after removal • removal of residual waterproofing compound or membrane • patching, filling and/or bridging any cavities, hold, voids, deterioration, crumbling or concrete in the door/window hobs after removal • applying new waterproofing 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 a compliant waterproof detail and a subsill fixing point. The Balcony refurbishment works undertaken to re-waterproof all the balconies involved: • 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. The internal works involved: • rectification of any pre-existing water damage to tiles, floor surfaces, cooktops, benchtops, splash backs, cupboard doors and anything else within the work zone • bedroom windows with similar ingress water damage • any additional works approved by the Apartment owner need to be for by apartment owners. Air Conditioning unit works involved: • decommissioning and recommissioning air conditioning unit compressors, which need to be removed and replaced to undertake the works or where ducting needs to be redirected through new joinery • air conditioning unit ducting penetrating an external wall of the property, the works include repair, fill, retexture and touch up to external paintwork • if the air conditioning unit is in poor condition the apartment owner is given the option of replacing with a new unit, in which case they would pay additional amounts for the new units and additional work items over and above the special levies for the principal works contract. The air conditioner was removed from the balcony to undertake the waterproofing and tiling works and then the same was reinstalled when the works were completed. Your air conditioning unit was not replaced as it was only a few years old at the time the works were undertaken. Special levy contributions: • at the Body Corporate EGM, members resolved that a special sinking fund contribution amounting to $XXX,XXX.XX inclusive of GST be raised to fund the Body Corporate's obligation for the works • the special levy is to be paid in quarterly instalments • you have received all notices from the Body Corporate • the special levy was imposed specifically to pay for the Building Remediation project as outlined in provided contracts. Expenses were incurred in relation to the Works for: • a lawyer to review the contract • progressive claims for the works • tiles • project management • engineering advice. No insurance claims were made for any repairs in the interim. XX XXXXX 20XX, the works were XXX% complete.

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

Reasons for decision: 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. | 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 (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 , 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 - i.e. whether the payment is to meet the member's proportion of their mutual liabilities. • the capacity in which an amount is paid - i.e. 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, you received and paid notices of contribution (notices) from the Body Corporate that detailed special levies and due dates. 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 you are 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 your contribution , to the 'expected' mutual liabilities for the Works, the mutual Works expenses (refer TR 2015/13, paragraph 67). | Detailed Reasoning - Are the Works expenses incurred to date 'for repairs' to property or capital in nature?: TR 97/23 provides the Commissioner's view regarding circumstances in which expenditure is deductible under section 25-10. | Detailed Reasoning - Deductions for repairs: Section 25-10 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 explains the circumstances in which deductions for repairs are allowable under section 25-10. TR 97/23 states that in its context in section 25-10, 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. | 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. 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: (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. 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. 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. 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. The rational for denying a deduction for initial repairs is that the acquisition price (or rent in case of a leased property) will probably have been adjusted to take account of the defects (although that will not always be the case) and the cost of the repairs is really part of the capital acquisition cost. The leading Australian case in this area is WG Thomas & Co Pty Ltd v FC of T (1965) 14 ATD 78; 1965 115 CLR 58. The taxpayer in that case purchased a building, unaware that extensive repairs were needed for the taxpayer to be able to carry on its business as a flour and grain merchant. In due course, the taxpayer carried out those repairs but also altered and enlarged an office and installed a lunchroom and other amenities. Windeyer J said that all the work in question could be fairly described as repairs to the building, to make good the deterioration that has occurred by ordinary wear and tear, or by the operation of natural causes, over a period of time. However, his Honour went on to say (at CLR p 3; ATD p 87) that if a capital asset acquired for use in the taxpayer's business "is not in good order nor suitable for use in the way intended, the cost of putting in order suitable for use is part of the cost of acquisition and not a cost of it maintenance" Accordingly, the expenditure in question was capital expenditure and thus not deductible. In his judgement, Windeyer J referred not only to the Law Shipping Co case but also to Collector of IT, Cook Islands v AB Donald Ltd (1965) 14 ATD 152, which came before the Supreme Court of New Zealand by way of a case stated from a decision of the High Court of the Cook Islands. The taxpayer in that case purchased an ocean-going vessel and, after a short period of trading, expended a large sum in repairing the vessel, which the taxpayer claimed as a deduction apportioned between 2 successive income years. The Court held that, to the extent to which the repairs to the vessel restored defects existing at the time of purchase, there was an improvement in the quality of the vessel and therefore the expenditure was capital expenditure, Woodhouse J said: "Defects may arise gradually over an extended period or develop from unexpected or sudden causes, but in so far as they have matured by the time of purchase by the new owner, they affect the quality of the asset he has acquired. Any subsequent need to remove them must be regarded as a legacy inherited by him as part of his bargain. It follows, therefore, that I take the view that the restoration of defects in an asset cannot be classed as a revenue charge unless the defects have arisen out of the taxpayer's application of that asset in his search for income and unless the work is limited to those defects and does not become enlarged into such a reconstruction that a permanent improvement in quality has been effected." It is immaterial that some of the repair work is carried out progressively as the particular property or item is bought into use or that some income is earned from it before the work is carried out (e.g. Case W7, 89 ATC 161). Capital expenditure does not cease to be capital expenditure simply because the work is carried out over a period of weeks or months and paid for it as it is done ( WG Thomas & Co I per Windeyer J at CLR p 74;ATD p 88). Note that the initial repairs concept only applies where the asset is acquired with defects. | 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. Although an immediate deduction is not available for the special levies in relation to the works undertaken at your apartment, a capital works deduction is allowed at the rate of 2.5% each income year while the property is used for income producing purposes. | Detailed Reasoning - Application to your circumstances: You have advised that when you acquired the apartment, in XXXXX 20XX, you didn't request a property report. You also advised at the time of purchasing the apartment the doors, windows and balcony were in working order. You have provided photos taken at the time of purchase, and you believe there were no signs of damage, making the property suitable for tenanting. However, we have noted that the photo, you provided, of the tiles shows gaps in the tile grouting. The grout deterioration was reported by Company A in their report of XX XXXXX 20XX. In your case, when you acquired the apartment, the water ingress issues had been reported to the Body Corporate (Company A Report A of XX XXXXX 20XX), and therefore the issues existed prior to your acquisition of the Property. The Body Corporate payments you have made to the special levy fund, for the repairs required to your apartment, and others in the apartment block, were derived for a particular capital expenditure. The repairs were discovered and reported to the Body Corporate in reports in 20XX and 20XX. Consequently, the remediation work relates to initial repairs and are capital in nature. The work undertaken to rectify the building defects that were in place prior to you acquiring the property are a capital expenditure and not deductible under section 25-10, but are deductable under Division 43. It is immaterial whether at the time of acquisition you were aware of the condition of the property, including its need for repairs. Therefore, no deduction is allowed, by the Commissioner under section 25-10 for the cost of water ingress repairs to the doors, windows and balcony of your apartment.