Do you know how to treat a Special Levy payment?
This is the time of year when we get lots of clients contacting us about the tax treatment of Special Levies that were imposed on them last tax year.
Most clients of course think (or hope) a Special Levy payment can be expensed, like sinking fund or admin fund contributions. But we, and you, know better than that.
We are always happy to chat to your clients and tease out the information we need to suggest how the Special Levy should be treated.
The first thing we ask them is what was the purpose of the Special Levy.
Then we ask them when they started to rent out the property.
Armed with the answers to these questions, we can make a suggestion.
Do you have a client you would like us to have a chat with? You can make an enquiry here. It doesn’t have to be related to a Special Levy, it can just be a new enquiry for a Depreciation Schedule, too. We’re here to consult with your clients to determine the most sensible option for them.
- Special Levies are imposed when a building has problems and there is insufficient money in the sinking fund to deal with those problems.
- The longer a client has been renting out a property, the greater the chance of claiming work as repairs rather than improvements.
- If a client has only recently started to rent out a property and the building problem existed before then, it’s not a repair and they need to claim the Cap Works at 2.5%.
Let’s look at the purpose of the Special Levy
Special Levies tend to be imposed when a building has problems that have become apparent and there is insufficient money in the sinking fund to deal with those problems.
In the last month, we have had clients contact us about Special Levies that have been required to deal with a failed roof membrane, concrete cancer, and a collapsed (subsidence) driveway.
One of these resulted in a $35,200 Levy for that client, so there is an understandable hope that it can be expensed because ‘that work was a repair, right?’
Not so fast, we said. ‘When did you start renting out your property?’
Why is the date of first rental relevant to Special Levies?
As you know, the ATO’s definition of a ‘repair’ in general terms is to deal with damage that occurred while a client was renting out a property. The longer a client has been renting out a property, the greater the chance of claiming work as repairs (vs improvements).
If a client has only recently started to rent out a property and the building problem existed before then, it’s not a repair and they need to claim the Capital Works at 2.5%.
Last year we had a client who came up with what they thought was a cunning plan.
They knew there was a Special Levy coming. It had even been minuted in the previous year’s annual strata meeting. Their idea was to rent out their apartment before the Special Levy notice came to them and then claim that work as a repair. We let them down gently.
Of the above three examples above, the failing roof membrane was a problem known about for years. So was the concrete cancer. The driveway collapse was a bit of a surprise – a broken stormwater pipe undermined it and a removalist truck finished the job. This was a legitimate repair – insurance did not cover the whole cost.
A case study in concrete cancer
More than half the enquiries we get about Special Levies are related to concrete cancer. Concrete cancer occurs when the steel work in concrete rusts and expands and the concrete cracks and blows off in places. It can be a terribly expensive thing to deal with.
Some years ago, we were engaged by the strata manager of an apartment building on the Sunshine Coast in Queensland to help them suggest to investment apartment owners how they could deal with the treatment of a Special Levy that was about to lob into their inboxes.
The average Special Levy was $55,000 (the unit entitlement determines the exact amount), so it would have been a disappointing surprise to many owners.
We asked the strata manager to go back through the strata records and tell us when the spectre of concrete cancer first became apparent. Eight years prior. Yep – that’s a long time to kick a can down the road.
Knowing the nature of work and when the problem was first known, we then contacted all investor owners and asked them when they started to rent out their apartment.
Nearly all investors either bought their apartment less than eight years prior or had lived there previously and started to rent it out less than eight years prior. None of those owners could legitimately claim the Special Levy as a deduction because they started to rent out their apartment when the issue was very much known about.
There were a few owners who had only recently purchased their apartment and were very surprised about the Special Levy. We commiserated with them – it would have been mean spirited to suggest that a $300 strata report might have been wise investment given the estimated cost of the total job had been noted in the strata minutes for the preceding couple of years.
And there were some owners who had been renting out their apartments for almost twenty years. For those owners, we felt the cost of dealing with the concrete cancer could be expensed as a repair.
Do you have a client you would like us to have a chat with? Make an enquiry here.