Not all strata levies are deductible for tax purposes.
Are Strata Levies Tax Deductible?
Section 8-1 of the Income Tax Assessment Act 1997 (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. We therefore have two criteria that need to be satisfied in order to claim a tax deduction for strata levies, namely:
- Incurred in producing assessable income; and
- Not be for capital, private or domestic purposes.
Incurred in Producing Assessable Income:
This question is fairly straightforward. If your strata property is used for the purposes of receiving income (eg: rental income or running a business), then this criterion is clearly satisfied.
Not for Capital, Private or Domestic Purposes:
- Capital Purposes: Strata levies may be incurred to cover the cost of day-to-day administration or, alternatively, they may be applied for specific major works / capital expenditure. As capital works are not deductible under Section 8-1, levies raised for their expenditure are generally not deductible for tax purposes. Thankfully though, the Australian Taxation Office (ATO) recognies that not all reserve funds are used toward capital expenditure and provides written guidance in relation to their interpretation of reserve/sinking fund levies via NAT 1729. In short, if levies are raised in a consistent manner toward a general purpose sinking fund (as opposed to one created for a specific purpose), then the ATO will accept that such levies are mere payments for the provision of ongoing services provided by the strata company and are therefore not for capital purposes. This remains the case even when money in a general purpose sinking fund ends up being used for a capital purpose down the track.
- Private or Domestic Purposes: The extent to which your property is used for private or domestic purposes can limit your entitlement to a tax deduction for your strata levies. The proportion of private use can vary from 0% (eg: where a property is wholly leased to a tenant), in which case you are entitled to claim your levies in full, right up to 100% (eg: your private home) where no deduction is available for tax purposes. Many a situations also occurs where a property is used partially for income producing purposes and partially for private/domestic purposes. In such scenarios, it may be possible to still claim a portion of your strata levies but it is always best to seek independant professional advice as to what percentage of your levies (if any) should be claimed as there are several matters (including possible capital gains tax consequences) that should be considered.
- As a general rule, regular and consistent reserve fund contributions, as opposed to special levies raised only when funds are needed, equate to better tax outcomes for landlord owners.
- Splitting of a strata's financial reports into project specific fund categories / groups will increase the likelihood of the ATO deeming levies paid towards that category / group to be capital in nature... and therefore not deductible for tax purposes.
- Keep in mind that surplus admin funds can, in certain circumstances, be transferred to a reserve fund.
For more information, please contact the Ascend office via your strata manager.
- ATO: NAT 1729
The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above. Please contact our office for more information.
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