Are you entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 ('ITAA 1997') for the full amount of a special levy imposed to fund remedial works on waterproofing where the works are not in relation to initial repairs upon acquiring the property?
No. This ruling applies for the following period : Year ending 30 June 2024 The scheme commenced on: 10 May 2024
You purchased the Relevant Property on XX XX XXXX as a rental property. The Relevant Property is part of a strata title that is managed by the Owners Corporation. On XX XX XXXX, an engineer's report ('the Report') was prepared by XX for the Owners Corporation. The Report notes that an inspection was carried out on XX XX XXXX, where it was observed that the Relevant Property had been experiencing water ingress, and spalling and cracking to the concrete balconies and entrance walkway. The Report recommends that intervention should occur so as to not compromise the long-term structural durability of the structures. The Report includes the following scope of work: a. repair of spalling and cracked concrete on balconies; b. waterproofing and surface refinishing of balconies; c. replacement of balcony balustrades as they are currently non-compliant with the National Construction Code, the proposed waterproofing works will impact on its structure; d. waterproofing of sliding doors; e. replacement of sliding doors, which includes an upgrade of the existing glazing; f. repair of spalling and cracked concrete on the building's entrance walkway;
g. waterproofing and surface refinishing of the building's entrance walkway; h. replacement of the entrance walkway's balustrade using the same methodology for the balcony balustrades; i. replacement and waterproofing of windows and maintenance of window lintels. On XX XX XXXX, at an extraordinary general meeting of the Owners Corporation, it was resolved by the Owners Corporation that they would engage XX, and that a special levy totalling $X would be raised to fund remediation works. Also on XX XX XXXX, you were issued a levy notice for $X for the special levy. The levy notice was payable by XX XX XXXX. You noted the following about the defects and remediation works: a. The special levy is for waterproofing work and rectification of resulting defects from water ingress, including concrete spalling and structural deterioration. b. The defects are from normal wear and tear and degradation of the building's original waterproofing to restore it to a functioning state. c. The defects have occurred over time during the course of your property ownership.
d. The works are not part of any broader capital improvement projects. They are undertaken to restore the building to its original functioning state. e. The works will not significantly enhance the property beyond its original condition. f. Materials and methods used are substantially the same as the original construction, except where modern equivalents are required due to availability or compliance with updated building codes. g. The works are not specific to an individual owner's improvements but are necessary for the structural integrity of the building. h. The costs incurred are not initial construction costs but relate to an existing structure that has already been subject to wear and tear. i. The works do not create a new asset, but merely restore the existing waterproofing.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 8-5 Income Tax Assessment Act 1997 section 25-10 Income Tax Assessment Act 1997 Division 43 Does IVA apply to this private ruling? No.
Question 1 Are you entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 ('ITAA 1997') for the full amount of a special levy imposed to fund remedial works on waterproofing where the works are not in relation to initial repairs upon acquiring the property? Summary You are not entitled to a deduction under section 25-10 of the ITAA 1997 for the full amount of the special levy imposed as the full amount of the special levy does not relate to repairs. Detailed reasoning General deductions for owners corporation levies Section 8-1 provides that you can deduct any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, or private or domestic nature. Typically, levies paid to owners corporations for general purposes are able to be claimed as a deduction under section 8-1. However, where special levies are imposed, the purpose of the levy needs to be considered to determine whether the outgoing is deductible, along with consideration of specific deductions.
Section 8-5 provides that you can also deduct from your assessable income an amount that a provision of the Act allows you to deduct; these are known as specific deductions. Meaning of 'repairs' Section 25-10 is a specific deduction provision, which allows you to deduct expenditure 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, subsection 25-10(3) provides that you cannot deduct capital expenditure under this section. Instead, expenditure for capital works may be deductible under Division 43. 'Repairs' is not defined in the ITAA 1997 and takes its ordinary meaning. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides the Commissioner's view on the meaning of 'repairs' and the circumstances in which expenditure incurred by a taxpayer can be an allowable deduction under section 25-10.
Paragraph 13 of TR 97/23 provides that the ordinary meaning of 'repairs' is the remedying or making good of defects in, damage to, or deterioration of, property to be repaired. Paragraph 15 of TR 97/23 further provides the following on the meaning of 'repairs': 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. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes during the passage of time. Drawing from the meaning of 'repairs' outlined above, TR 97/23 outlines the following principles when considering whether expenditure will fall within the meaning of 'repairs' for the purposes of section 25-10:
a. Improvements that provide a greater efficiency of function in the property or bringing a structure into a more valuable or desirable condition than a mere repair would do are not repairs. [1] However, a minor or incidental degree of improvement done to the property may still be a repair. [2] b. Where materials used differ from the original, the work done may either be a repair or an improvement. [3] It is restoration of the thing's efficiency of function rather than exact repetition of form or material that is significant, and the test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10. [4] c. Expenditure incurred on initial repairs to remedy defects or deterioration that existed at the date of acquisition are capital in nature and therefore not deductible under section 25-10. [5]
d. Where something is being replaced, it is necessary to consider whether the property that is being replaced is a subsidiary part of a whole or the entirety of an asset. Replacement or renewal of subsidiary parts of a whole may be repairs, while replacement of an entirety will not. [6] Paragraph 40 of TR 97/23 notes that a window in a factory would not constitute an entirety even if the window is totally restored. e. Where work is done to meet requirements of regulatory bodies, it must satisfy the general principles in TR 97/23. Where work is done solely to meet requirements of regulatory bodies, they are not repairs for the purposes of section 25-10. [7] Application to your circumstances Are the works 'repairs' for the purposes of section 25-10? Although the special levy notice does not itemise the works, in considering whether the remediation works will be 'repairs' for the purposes of section 25-10, it is necessary to consider the works as the separate items as follows: a. repair of spalling and cracked concrete on balconies; b. waterproofing and surface refinishing of balconies;
c. replacement of balcony balustrades as they are currently non-compliant with the National Construction Code, the proposed waterproofing works will impact on its structure; d. waterproofing of sliding doors; e. replacement of sliding doors, which includes an upgrade of the existing glazing; f. repair of spalling and cracked concrete on the building's entrance walkway; g. waterproofing and surface refinishing of the building's entrance walkway; h. replacement of the entrance walkway's balustrade using the same methodology for the balcony balustrades; i. replacement and waterproofing of windows and maintenance of window lintels. Items a, b, f, and g: repair of spalling and cracked concrete on balconies and entrance walkway and waterproofing and surface refinishing of balconies and entrance walkway It is accepted that these items are not initial repairs. While the level of deterioration of your balcony and the building's entrance walkway is unclear at the time you acquired the Relevant Property, it is accepted that they have been in working order and suitable to be used to derive assessable income since you acquired the Relevant Property in 2014.
These items of work involve restoring your balcony and the building's entrance walkway to their former states and do not change their character. They are consistent with paragraph 15 of TR 97/23 in that they are done to make good deterioration that has occurred by ordinary wear and tear to a part of something. The balcony and walkway are not being replaced in their entirety. While different materials may be used in completing the repairs, waterproofing, and surface refinishing, any improvement in the balcony and walkway's efficiency of function is insufficient to justify characterising these items as improvements. Any improvements would be minor and incidental. Accordingly, these items of work will be 'repairs' for the purposes of section 25-10. Items c and h: replacement of balcony and entrance walkway balustrades It is accepted that these items are not initial repairs. It is accepted that the balustrades were in working order and have been used by you to derive assessable income since you acquired the Relevant Property in 2014.
However, it is clear from pages XX and XX of the Report that the replacement of the balustrades has been recommended primarily because they are not compliant with the National Construction Code. The Report at page XX states that it is not a requirement for the balustrade to be upgraded to meet current requirements, but they present a safety risk. The Report at page XX states that the existing balcony balustrades are non-compliant with the National Construction Code, and therefore they need to be upgraded. Furthermore, the Report does not note the presence of any defect or deterioration in the existing balustrades that would warrant their replacement. There is no defect or deterioration that is being restored or made good. As noted in paragraph 96 of TR 97/23, where work is done to meet requirements of regulatory bodies, it still needs to satisfy the general principles discussed in the Ruling to constitute a 'repair' for the purposes of section 25-10.
While the Report states that new balustrades will need to be installed if the current balustrades are removed, it does not change the fact that there are no defects or deterioration with respect to the balustrades. The absence of any defects or deterioration noted in the Report with respect to the balustrades is indicative that these items or work do not satisfy the general principles discussed in TR 97/23. Accordingly, any costs incurred to replace the balcony and entrance walkway balustrades will not be 'repairs' for the purposes of section 25-10 and would fall under the capital expenditure exception in subsection 25-10(3). Any outgoings incurred in relation to this item of work should be considered under Division 43. Items d and i: waterproofing of sliding doors, replacement and waterproofing of windows, and maintenance of window lintels
It is accepted that these items are not initial repairs. While the level of deterioration of the waterproofing to the sliding doors and windows, the windows, and the window lintels is unclear at the time you acquired the Relevant Property, it is accepted that they have been in working order and suitable to be used to derive assessable income since you acquired the Relevant Property in 2014. The Report indicates that water ingress has been occurring over some time, which has led to damage and deterioration to the sliding doors, windows, and lintels in the form of corrosion, cracking, and dilapidation. These proposed items of work involve restoring the efficiency of function of the waterproofing of the sliding doors and windows, as well as restoring the windows and lintels to their former condition. Because the windows are being replaced, it is necessary to consider whether they are a subsidiary part of the property or an entirety.
As noted in paragraph 40 of TR 97/23, a window is a subsidiary part of the property and does not constitute an entirety. A replacement of a window may therefore constitute a 'repair' for the purposes of section 25-10 if the other general principles of TR 97/23 are satisfied. Beyond remediating damage and deterioration, the Report does not note any improvement with the new windows compared to the current windows. The window replacements will only restore the windows to their former state and won't change their character. This is contrasted with the replacement of the sliding doors that is discussed below. Accordingly, these items of work will be 'repairs' for the purposes of section 25-10. Item e: replacement of sliding doors Unlike the replacement of the windows discussed above, the Report indicates that this item of work will include an upgrade of the existing glazing. An upgrade to window glazing will provide a greater efficiency of function of the sliding doors and will go beyond merely restoring the efficiency of function.
Accordingly, any costs incurred to replace the sliding doors will not be 'repairs' for the purposes of section 25-10 and would fall under the capital expenditure exception in subsection 25-10(3). Any outgoings incurred in relation to this item of work should be considered under Division 43. Conclusion You will not be entitled to a deduction under section 25-10 for the full amount of the special levy as some of the items of work are not repairs for the purposes of section 25-10. The extent to which you can claim a tax deduction under section 25-10, as opposed to capital works under Division 43, is limited by the amounts that relate to repairs, being items a, b, d, f, g, and i discussed above. > [1] Paragraph 44 of TR 97/23. [2] Ibid, paragraph 16. [3] Ibid, paragraph 48. [4] Ibid, paragraphs 50-1, 120-4. [5] Ibid, paragraph 59. [6] Ibid paragraphs 36-42, 87 and 113. [7] Ibid, paragraphs 96-7.