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 contributions levied by a strata title body corporate in relation to their rental property and which are paid into an administration fund or general purpose sinking fund?
Decision
Yes. A taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of contributions levied by a strata title body corporate in relation to their rental property and which are paid into an administration fund or general purpose sinking fund.
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 taxpayer is required to pay regular contributions levied by the body corporate. These contributions are paid into either an administration fund or a general purpose sinking fund and are used by the body corporate to carry out its various duties and functions.
The administration fund is used by the body corporate for payment of the day to day expenses of administration, general maintenance and repair of the common property.
The general purpose sinking fund is used by the body corporate for the payment of non-routine expenses that are incurred in maintaining the common property.
Some of the expenses paid by the body corporate out of these funds may be of a capital nature.
The body corporate has not levied a special contribution for any particular capital expenditure.
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 and 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 payment of regular contributions levied by the body corporate into an administration fund or general purpose sinking fund are considered to be payments for provision of services by the body corporate. Where the payments are made in relation to a rental property there is a sufficient connection with the earning of assessable income from the rental property.
The fact that the body corporate may subsequently use some of the contributions levied for capital expenses is not relevant in determining the nature and purpose of the payments made by the taxpayer to the body corporate. The payments are therefore not considered to be capital in nature.
Accordingly, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of these regular contributions levied by the body corporate and paid into an administration fund or general purpose sinking fund.