Strata property owners are required by the Building Maintenance & Strata Act (BMSMA) to pay Management Fund (MF) and Sinking Fund (SF) to the Management Corporation (MC) for the maintenance of the common property of the strata development. The MF is used by the MC for routine expenses such as hiring of managing agent, security, cleaning and other minor repairs/replacement of the common property. The SF is for major replacement/repairs such as painting work and is usually collected for future purposes. At times, an MC may collect additional fund, usually known as Special Levy (SL) for special projects or when the MC runs into some cash flow problem.

Under the Property Tax Act (PTA), only expenses related to the subject property under assessment are allowed as deductibles. Since the case authority “Chartered Bank v The City Council of Singapore [1959], the Inland Revenue Authority of Singapore (IRAS) has been adopting the regime that payment for MF to the MC by any strata owner be treated as payment for “services” and MF then started to be known as “service charge”. For this reason, the MF has been allowed as tax deductible.

However, this is now set to change after the Court of Appeal in Tan Hee Liang v Chief Assessor & Another [2008] questioned the practice of the tax authority.

The MF, SF and SL are levied against strata owners for the maintenance of the common property. They are not paid out by strata owners directly for “services” incurred for the strata lots and certainly not for the maintenance of the strata lots.

Two issues:

1. If there is a special levy (SL) made to the MC and such levy is for expenditures of an ongoing concern (say for topping up insufficient fund for routine expenses), wouldn't it be possible to treat same like the MF?

2. Unlike the MF (which is for ongoing liabilities), the SF is largely required for future replacements and repairs and usually levied at a smaller sum compared with the MF. If the SF is treated as deductible, would strata owners need to show cause that their payments are indeed used for expenditures incurred by the MCs in the year of assessment? Would the audited accounts of the MCs be sufficient as evidence for such cause?

The Court of Appeal noted that the IRAS has the power to grant concession for administrative reasons and therefore suggested that the tax authority set up new guidelines with respect to contributions for sinking fund payable by strata owners.

If a change in tax is made for contribution of sinking fund, it would benefit thousands of owners renting out their strata properties.