Body corporate fees as a tax deduction
Many investors who either own or are planning to buy a strata property are unsure as to whether they can claim Body Corporate Fees as a tax deduction. The answer depends on the type of Body Corporate Fee charged. There are usually three types of Body Corporate charges:
• Administration Levy – this is a levy to cover the day to day running of the complex (e.g. common water, common insurance, maintenance of lawns, management of the Body Corporate etc).
• General Purpose Sinking Fund Levy – this is a levy that is imposed to cover non routine expenses (e.g. roof replacement or major repainting). It usually accumulates in a separate fund and is done so that owners are not hit with a large “one off” expense for major works.
• Special Purpose Levy – this is usually a one off levy on the owners to pay for major works or a major expense required.
So, are all of these Body Corporate / Strata Fees deductible?
The ATO consider that the expenses are deductible to the owner based on what the fees are ultimately spent on (either a capital item or a deductible item). However given the very difficult task for the owner in trying to figure out what was spent on what, the ATO have accepted the following general rules.
Administration Fund Levies that are for the general running expenses of the complex are deductible when incurred.
Sinking Fund Levies that are imposed on a regular basis are deductible and the owner does not need to differentiate based on what happens to the funds (i.e. whether spent on deductible expenditure or capital expenditure).
Special Purpose Levies must be traced to see what the actual funds raised were used for. If they were to repaint the entire complex or replace the entire driveway, they would be capital expenses and not deductible.
From an owners tax perspective it would be better for the strata body to collect General Purpose Sinking Fund levies (tax deductible) rather than wait until something major is required and impose a Special Purpose Levy, which if used for a capital improvement, would not be deductible (but may be depreciable).
Before buying any strata property, you should always check to see if the strata company has a sinking fund to help with major improvements. Not only is it less of a financial burden to pay a regular payment than a one-off levy, it is also more tax effective as well.
Momentum Wealth and its affiliated entities are not Accountants. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.
By Damian Collins