It has something to do with Max Category depth setting in the front page settings. Expand/Collapse works (not always though) if maxcategorydepth setting is not unlimited or not greater than actual max depth. In other words, the cases are:

maxcategorydepth = unlimited - this does not work at all
maxcategorydepth = 2, when actual category structure has depth of 2 or more - works on my clean installation, but doesn't work on client's site (migrated from the older version)
maxcategorydepth = 3, when actual category structure has depth of 2 - didn't work.