Can you claim a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of the special levy paid to the body corporate for repairs to the unit complex?
Yes. This ruling applies for the following periods: Year ended 30 June 20YY Year ending 30 June 20YY The scheme commenced on: 1 July 20YY
You purchased an investment property in MM 19YY. It is a unit in a complex of five units. The property was built in 19YY. You did not obtain a property report at the time of purchase. The property has been continuously rented. On DD MM 20YY the annual general meeting of the strata resolved to raise a special level for the purposes of remediation work for structural damage caused by storm events and for ordinary wear and tear. An insurance assessment determined the damage occurred due to ordinary wear and tear on the building and was therefore not covered. The owners' corporation tendered for the building works and approved a quotation for the works. The works include: For unit x: removal of: existing balcony surface, screening and timber awning, parapet and balustrade, asbestos parapet sheeting, western balcony plinth, wiring between dwelling and awning and timber doors and window. remediation to: screed of balcony floor, bricks and mortar of balcony external walls, cracks and concrete spalling. installation of replacement: cavity flashing and waterproofing, tiling, glass balustrade, aluminium doors and window. For unit x:
repair to the living room ceiling and cornice and repaint of ceiling. For unit x: repair to the bedroom, living room and kitchen cornices and repaint of respective ceilings. For unit x: repair to both bedroom cornices and re-paint, removal of bedrooms blinds and mould clean, ceiling repair and re-paint in the living room, kitchen. On DD MM 20YY the owner's corporation initiated a special levy to fund the remedial works. Your share of the special levy was $XX,XXX.XX (inclusive of GST) payable in two instalments. You have paid the amounts to the strata special levy fund. The remedial work commenced in MM 20YY and is expected to be completed in early 20YY. A certificate of compliance is required on completion of the works. You continue to rent out the property.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 25-10
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. Under section 25-10 of the ITAA 1997, you can deduct expenditure that 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. You cannot deduct capital expenditure under section 25-10. Body corporate fees and charges - special levy Strata title body corporates are constituted under the strata title legislation of the various states and territories. Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or for a special purpose. If the body corporate requires you to make payments to a special purpose fund to pay for particular capital expenditure, this type of special levies are generally 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, paragraph 25).
However, in some circumstances, these special levies may be able to be claimed as a deduction in the income year that they were incurred. Therefore, we need to consider whether the expenses for which the levy monies were used are deductible. Body corporates may impose levies on proprietors for special purpose funds to meet expenses common to all proprietors. Depending on the nature of the transactions, and weighing a range of factors, these levies may amount to 'mutual receipts'. Relevant factors are set out in Taxation Ruling TR 2025/3 : Income tax: matters relating to strata title bodies constituted under strata title legislation and include: • the relationship between a special levy amount and the common fund • the purpose for which the payment is made - i.e., whether the payment is to meet the member's proportion of their mutual liabilities • the capacity in which an amount is paid - i.e., whether the member is dealing with the strata title body in their role as a member (TR 2015/3, paragraph 25).
The obligation arises as a consequence of being an owner and is in a sense part of the estimate of the amount which is required to meet the owner's proportion of their mutual liabilities. Such a receipt is a contribution by that owner for the common benefit of all the owners. In this case, you were invoiced by the body corporate and have since paid an amount towards the special levy. The invoice states that these works were for: 'balcony, internal repairs and project management'. Having regard to the principles, the Commissioner considers that mutuality applies to the amount paid by you to the strata title body, which is directed to a special purpose fund. The special levies are 'mutual receipts' (refer paragraph 24 of TR 2015/3) that are held by the body corporate for the common benefit of all the proprietors (refer paragraph 67) to undertake the works.
You incurred the liability to pay the special levy expense in your capacity as a property owner as part of the owner's corporation for the remedial work at the complex/units. The payment of contributions and levies represent the owner's share in the mutual liabilities of the strata title body, and they are a contribution to a common fund. It follows that, where the levy is used to fund expenditure which would be otherwise deductible, then the contribution made towards the levy is also deductible. Repairs Taxation Ruling TR 97/23 Income tax: deductions for repairs provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had. Works can be fairly described as repairs if they are done to make good damage or deterioration of property 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.
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. 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. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. Application to your circumstances
In your case, the special purpose levy was used by the body corporate to remedy wear and tear and storm damage to the following: Balcony works The balcony refurbishment works were undertaken to repair damage and deterioration to the balcony. Rectification works to the balcony is a repair for the purpose of section 25-10 of the ITAA 1997. Internal works The tender includes rectifying damage to ceilings and cornices inside the apartments caused by water ingress. These internal works are for repairs and are not capital in nature. Other expenses incurred Other expenses were incurred for project management. These expenses can be characterised with reference to the purpose for which they were incurred. As these expenses were incurred for the purpose of the remedial works they are similarly characterised and are for repairs and not capital in nature. Entitlement to deduct an amount of the special levies under section 25-10
The mutuality principle applies to amounts levied on proprietors by a strata title body in accordance with the applicable strata title enactment where such amounts form part of a fund used for the day-to-day expenses, general maintenance and repair of common property or for the establishment of special purpose funds as set out under the relevant enactment. When the special levy notices are received or paid, you do not 'incur' debts to which you are completely subjected as the special levies are contributions to the special fund to pay for the mutual works expenses. As such, no deductions arise at the time of receipt or payment of the notices. The special levies are not 'incurred' on receipt or payment of the notices as you are not definitively committed to debts at that time. There is only an 'expectation' of debts to be paid in the future - when expenses are incurred for the works. The special levies are an estimate of the contribution in respect of your contribution, to the 'expected' mutual liabilities for the works, the mutual works expenses (refer TR 2015/3, paragraph 67). In your case, the mutual works expenses incurred are for repairs that are not capital in nature.
The mutual works expenses do not include any expenses incurred for additional remedial works that are not included in the tender and that are paid for separately by individual apartment owners in addition to the special levies. You are entitled to deductions in respect of the expenses in amounts proportionate with your share of the total special levies payable to the special levy fund (limited to the amount of special levies you have paid, less any amounts previously deducted).