Private ruling: Rental expenses - body corporate special levy expenses
Date of advice: 20 October 2025
Published: 8 December 2025
Ruling period: DD MM YY
Date scheme commenced: DD MM YY

Ruling: Q1: Can you claim an immediate deduction for the body corporate special levy instalments to remove and replace combustible cladding under section 8-1 of Income Tax Assessment Act 1997 (ITAA 1997) or section 25-10 of ITAA 1997? | A1: No. | Q2: Can you claim a capital works deduction for the body corporate special levy instalments to remove and replace combustible under Division 43 of Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: On DD MM YY, you purchased a property located at XXXX (the property). You are the sole owner of the property. You resided at the property as owner-occupier from DD MM YY to DD MM YY. On DD MM YY, the property was made available for renting. You rented the property to friends. You entered into a formal rental agreement with the tenants. Rent of $XX per week is charged at market rate. You privately manage the rental agreement. On DD MM YY, (whilst living at the property), you applied to become a member of the strata committee. On DD MM YY, the strata manager confirmed there was no objection to you joining the committee and forwarded you the invite to a project presentation by a building company, scheduled for DD MM YY. On DD MM YY, you attended the meeting with the building company via video call. The building company mentioned a preliminary quote of approximately $X million for cladding rectification works. This was the first time you became aware that the building contained combustible cladding, which needed rectification. You were not aware of this building defect prior to settlement on DD MM YY, when you purchased the property. You initially did not know that the cost would fall directly on the lot owners. You assumed that the building's insurance, or government support might cover the issue. In the days immediately following the meeting with the building company, you came to understand, via the strata manager, that the lot owners would in fact be personally liable through special levies. This was the point at which you understood the seriousness of the financial burden. On DD MM YY, you sent an email to your conveyancer advising them that you'd just found out about the combustible cladding issue and that the property owners need to pay for the rectification. You also asked if you should have been notified about the matter before you purchased the property. In response, your conveyancer confirmed 'it appears that the issue only came to light after settlement. There was no way anyone would pick this up without a cladding report being made available.' The strata inspection report (DD MM YY) and the contract of sale (DD MM YY) mentioned only ordinary fire safety matters, not combustible cladding. The Building Product Rectification Order (issued by City of XXXX) was dated DD MM YY but you did not receive a copy of the report until DD MM YY. The Building Product Rectification Order stated: You being the owner in respect of the property at the abovementioned premises are ordered by City of XXXX Council to do such things as are specified in the Building Product Rectification Order so as to: a) To eliminate or minimise a safety risk posed by the use in the building of a building product to which a building product use ban applies, and b) To remediate or restore the building following the elimination or minimisation of the safety risk. The strata board administered the cladding restoration, and each apartment owner was charged a special levy. The Building Product Rectification Order outlined that the work was to be completed over four stages: Pursuant to clause 27 of Schedule 5 of the Environmental Planning and Assessment Act 1979, the period for compliance with this order is as follows: i. Stage/Term 1 works shall be completed within 60 days (DD MM YY) from the date of this order; ii. Stage/Term 2 works shall be completed within 90 days (DD MM YY) from the date of this order; iii. Stage/Term 3 works shall be completed within 365 days (DD MM YY) from the date of this order; iv. Stage/Term 4 works shall be completed within 395 days (DD MM YY) from the date of this order. You have paid multiple special levy instalments totalling $XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43

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 nature. You may be able to claim a deduction for body corporate fees and charges for your rental property. Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied for a special purpose fund. Payments you make to body corporate administration funds and general-purpose sinking funds are considered to be payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time you incur them. However, if the body corporate requires you to make payments to a special purpose fund to pay for particular capital expenditure, these levies are not deductible. This applies even if the work was done to meet the requirements of regulatory bodies (Taxation Ruling 97/23 Income tax: deductions for repairs (TR 97/23) , paragraph 25). Therefore, we need to consider whether the expenses the levy monies were used for are deductible. | Detailed Reasoning - Repairs: Section 25-10 of the ITAA 1997 states expenditure incurred by you for repairs to any premises, or part of premises, held or used by you solely for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature, for example, an initial repair. TR 97/23 provides the Commissioner's view on repairs that are allowable under section 25-10 of the ITAA 1997 and indicates that expenditure for repairs to property is of a capital nature where: • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or • the work is an initial repair. | Detailed Reasoning - Application to your circumstances.: In your case, the special purpose levy was used by the body corporate to remove and replace combustible cladding as noted in the Building Product Rectification Order issued by the Council of the City of XXXX. Division 43 of the ITAA 1997 provides a deduction for capital works used for income producing purposes. You can claim a deduction for costs you incur to replace or contribute to the replacement of combustible cladding to meet government requirements. To be able to claim a deduction, you must replace the combustible cladding with fire resistant cladding. You treat the replacement of the cladding as capital works. This is because we treat the replacement of cladding as: • an entire functional structure (being the outer covering of the building) • an improvement in the function of the outer covering of the building. This means the building is no longer a fire hazard and becomes fire resistant as an improved functional operation of the cladding. You can claim a deduction for the amount you contribute over a period of either 25 or 40 years. That is, 4% or 2.5% of the cost of the improvement being allowed in each year. The replacement of combustible cladding doesn't meet the requirements to be deductible as a repair or environmental protection activity. For more detail, see the Division 43 of the ITAA 1997: Deductions for capital works. Further information about combustible cladding replacements and body corporate special levies can be found by searching ato.gov.au for QC63879 and QC103905.