Special levies and tax deductions

Hi just wanted to see if anyone can shed some light on special levies and the deductions associated with them. Had two different strata IP's have some special levies last financial year. One was for roof(flashings) repairs for the complex and the other was for upgrading fire exit doors and equipment to comply with councils new regulations.

From my understanding only the roof repair levy will be deductible but at the 2.5% rule whilst the fire exit one will not be deductible as it was a legal request and not a capital expense. Does that sound right?

 

a repair to a roof can be fully deductible. depends on what was done.

Cost of Replacing Roof Deductible

 

Sounds to me as though roof repairs would be deductible; while the fire exit doors would be capital works, other "equipment" could be depreciable or capital works depending on what it was.

 

Thanks for the tips everyone.

Was hoping the fire equipment would be legal costs but that was just wishful thinking

 

Shame the owners corp didn't fund the costs from the general purpose sinking fund contributions.

 

Special levies can be raised for any purpose and a BC can have multiple sinking funds for specific or general purposes. Just because you pay levies does not mean they are automatically deductible if they have a special purpose. eg You may pay now but the repairs arent yet effected.

 

Does this apply to ordinary levies too? And in either case (ordinary/special), as an accountant, how do you go about getting the information from the BC as to whether the works were repairs or capital improvements to work out the deductibility?

 

I dont. Its the taxpayers job. Read the ATO 2020 rental Property Guide Page 15
https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Rental-properties-2020.pdf

I generally will recommend the client obtain a revised QS report based on special levies and it may even scrap existing building works (a missed deduction perhaps ?) . A QS can often asceratin and apportion deductible and non-deductible (eg building works) and include the common areas too. I suggest engaging with the QS early so they can guide you. Its just one of the specialist areas they can advise on to enhance tax benefits. They will tell you want info to obtain from the strata.

I had a client in 2018 pay $45K for special levies for concreet cancer issues to balconys. They feared they would have no deduction. And I advised there was none based on them paying either. The QS assessed the building works and the balcony elements and wrote off $15K of balcony construction remaining within the building construction amount which is a total and then also determined the works were a repair and when the work was completed identified the client share for their unit entitlement. Total deduction was more than they paid. ATO did review it and were satified to the nature and the way it was managed. They see many who will claim when paid, not when repaired. We even had copies of the strata costs info provided by the QS. QS did charge a fee for the extra work but it was hundreds only. Client had enhanced refunds of $20K+

 

We (Depreciator) are getting more queries this year than ever about Special Levies. I just had another one this afternoon. Here is what I tell people in simple terms:

1. When a strata building hits owners with a Special Levy, it is usually means the building has problems that need to be dealt with and the cost of doing that is more than the amount in the sinking fund.
2. Most people think they can claim the Special Levy as a ‘repair’ and claim the amount as an immediate 100% tax deduction. Not necessarily.
3. If the problem with the building is something that happened while YOU were renting out the property, it might be a repair.
4. But if the problem is something that started BEFORE you started renting out the property, you will probably need to depreciate the Special Levy – at 2.5%.
5. If the Special Levy is being used to 'improve' the building relative to the condition it was in when you started to rent it out, you're in 2.5% territory.

Now that is very general, obviously. But it's all in the nature of the work and the timing.

So CryptoClown, if you have been renting out the property for a while and those roof flashings failed recently, there is a good chance you can claim the cost to deal with them as a repair i.e. 100% immediate claim.
Upgrading the fire stuff would be an 'improvement' regardless of the fact the local council enforced it.

 

OK - so how about something like an Opal tower 'repair' - problem was apparently a result of construction issues, but this only became evident Christmas 2018 after people had been living there for a few months.

As it wasn't evident there was an issue until the first crack, would it be:

 

paragraph 61 of TR 97/23

"61. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs."

 

Spot on Mike - The initial repairs rule. We see initial repairs on things like termites, sewers, solar units and decking often. Can also apply to other items like carpets, kitchens etc and structural and OTP builds

Rarely we see the "inverse initial repair" issue. Eg Fred bought a IP in 2015 and had a p&b report. The report indicated roof was poor quality steel and wasnt galvanised but just colourbond/ Rood has minor surface coprrosion noted with no evident concern other than wrong materials and need for maintenance. Which was then ignored. Property is a coastal area. Four years later roof is kaput and together with some timbers if fully replaced with galvanised sheeting. Is this a initial repair, depreciable (Div 43) or a repair ?

Answer : Possible a repair and deductible. It doesnt meet the initial repair rule and the taxpayer possesses reasonable evidence if the ATO queried this . The roof materials are substantially similar eg colourbond v gal. Div 43 doesnt apply since its a BUILDING repair and a roof is part of a building and hence a replacement / improvement arent relevant.

The mascot towers which continue to crack and are unstable also initial repairs IF the issue is attributable to structural defects. BUT if the neighbouring site causes the defects it could be a repair. Private ruling for all owners is best obtained.