Body corporate fees - taxpayer still living in a property that they intend to use as a rental property

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the body corporate fees they incurred for a period they were still living in a property that they intend to use as a rental property?

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the body corporate fees they incurred for a period they were still living in a property that they intend to use as a rental property.

The taxpayer purchased a strata titled property (the unit).

The taxpayer occupied the unit from the time they purchased it.

The taxpayer decided to make the unit available for rent and listed it with a real estate agent. They continued to live in the unit during the period it was listed with the agent.

After a period of time tenants were found for the unit. The taxpayer moved out of the unit a few days before the tenants moved in.

The taxpayer paid body corporate fees (payable in relation to day to day administration and maintenance). The fees were in relation to the period where the property was listed with the real estate agent as available for rent and during which the taxpayer continued to live in the property.

Section 8-1 of the 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, or relate to the earning of exempt income.

A taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for body corporate fees (for day to day administration and maintenance) paid with regard to a rental property (ATO Interpretative Decision 2002/946). However, to be deductible under section 8-1 of the ITAA 1997, the expense must be incurred by the taxpayer in relation to the period of the year that the rental property is either rented or is available for rent.

Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steele's Case ) concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances: • the interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities: • the interest is not private or domestic • the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between the outgoings and assessable income is lost • the interest is incurred with one end in view, the gaining or producing of assessable income; and • continuing efforts are undertaken in pursuit of that end.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure. For example local council, water and sewage rates and real estate agent fees (ATO Interpretative Decision 2002/364). The principles can also be applied to body corporate fees.

Where a taxpayer's main residence is converted to a rental property, deductions may be available for expenses incurred from the date the property is genuinely available for rent at commercial rates.

However where the taxpayer continues to use the property for private or domestic purposes prior to the derivation of rental income, they would not be entitled to deductions for expenses incurred in relation to the period of the private use of the property. This is so even if the property has been listed with an agent for the purpose of obtaining tenants. The expenses in relation to the period the taxpayer continues to occupy the premises have the character of private expenditure.

Whilst the taxpayer had made the unit available for rent, they continued to use the unit for their private or domestic purposes. The body corporate fees paid with regard to the period the taxpayer continued to occupy the unit have the character of a private expense. Accordingly the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the body corporate fees incurred in relation to the period they continued to occupy the unit. [HISTORY: This ATOID was amended on 7 May 2007 by replacing the references to Taxation Ruling TR 2000/17 with references to Taxation Ruling TR 2004/4.]