Issue
Is a taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the payment of a special contribution levied for particular capital expenditure by the strata title body corporate of their rental property?
Decision
No. A taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of a special contribution levied for particular capital expenditure by the strata title body corporate of their rental property.
Facts
The taxpayer owns a strata titled rental property from which they earn assessable rental income.
As owner of the rental property, the taxpayer is a member of a body corporate which is subject to the relevant state strata title legislation.
The body corporate levied a special contribution to fund expenditure on particular capital items.
This special contribution was in addition to the regular contributions levied by the body corporate which are paid into an administration fund or general purpose sinking fund.
Reasons for Decision
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 number of significant court decisions have established that, for an expense to satisfy the requirements of section 8-1 of the ITAA 1997: • it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) • there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236); and • it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces their assessable income ( Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).
The body corporate levied a special contribution to fund expenditure on particular capital items. The character of an expense follows the purpose for which the expense was incurred. It follows therefore that the payment of a special contribution levied to fund expenditure on particular capital items is capital in nature.
Accordingly, the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of a special contribution levied for particular capital expenditure by the body corporate of their rental property. Note: It does not matter whether the special contribution is paid into a special purpose fund or into the body corporate's administration fund or general purpose sinking fund. The fund to which the payment is made does not alter the nature of the payment. It remains a payment of a special contribution levied to fund expenditure on specific capital items.