Edited version of private advice

Authorisation Number: 1052384197639

Date of advice: 10 April 2025

Ruling

Subject: Deductions - repairs

Question 1

Can you claim a deduction in the income year ended DD MM 20YY under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of the work as repairs to your rental property?

Answer 1

No.

Question 2

Can you deduct the portion for repairs to your rental property that are not initial repairs under section 25-10 of the ITAA 1997?

Answer 2

Yes.

Question 3

Can you deduct the portion of the initial repairs to your rental property as a capital works deduction at the rate of 2.5% per income year?

Answer 3

Yes.

This ruling applies for the following periods:

Year ended DD MM 20YY

Year ended DD MM 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

You and your spouse purchased the property at XX XX XX as joint tenants on DD MM 20YY.

On DD MM 20YY you obtained a property condition report to identify any obvious or significant defects at the time of the inspection. The report included the following identified issues:

•                loose and leaking downpipe connections

•                pest damage to electrical wiring in the roof space

•                mould on the underside of flooring

•                rust on underfloor steelwork

•                damp soil and pooling water in the underfloor area, with site drainage as probable cause and a recommendation to seek further evaluation regarding waterproofing and drainage and underfloor ventilation

•                cracking and fretting mortar on exterior walls

•                bounce-back in parts of floor suggesting piers have sunk and shifted due to moisture content in soil and a recommendation that the damp issue be addressed and re-packing of floor frame.

The property was rented from DD MM 20YY.

On DD MM 20YY stormwater damage was identified by the tenants.

You raised a claim with your insurance company.

On DD MM 20YY your insurer undertook a building assessment report which identified rainwater seepage and entry through exposed masonry due to inherent building defects, and that moisture damage in a bedroom, skirting, carpet and external damp masonry walls indicated the damage commenced prior to you taking out insurance and was due to gradual deterioration.

The building report specifically identified:

•                rainwater seepage and entry through exposed masonry that was due to inherent building defects

•                long term rot/decay in a bedroom corner junction with elevated moisture levels

•                elevated moisture levels on the bedroom walls and skirting up to 50 cm

•                steel purlins had visual rust and corrosion and were cut with inadequate support and with limited soil clearance

•                dampness and efflorescence along all external walls with limited cross flow ventilation to adequately service the sub-floor space

•                soil / landscape build-up along the rear of the property above the damp course

•                plumbing tests found decreased water pressure due to a leaking kitchen mixer

•                poor water management due to build up in the guttering.

Your insurance claim was rejected.

During MM and MM 20YY, you undertook repairs to the property including:

•                replacement of earthenware stormwater pipes with PCV stormwater pipes

•                replacement of particle board flooring with damp proof flooring

•                new carpet

•                replacement of the bottom plasterboard walls to 1 metre

During the same period, you replaced a faulty kitchen tap, repaired pest-damaged wiring in the ceiling and replaced a faulty batten light.

You and your spouse paid for the repairs and claimed the expenses as repairs and maintenance in your respective income tax returns in the 20YY FY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Section 8-1 of the 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.

Repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income-producing purposes. However, no deduction is allowable where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides the Commissioner's view on the deductibility of repairs under section 25-10. A 'repair' involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Expenditure for repairs to property is of a capital nature where:

•                the extent of the work carried out represents a renewal or reconstruction of the entirety, or

•                the work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

•                the work is an initial repair.

Initial repairs

TR 97/23 uses the expression 'initial repair' to describe a repair that remedies defects, damage or deterioration of property:

a) in existence when the property was acquired, and

b) not arising from the operations of the taxpayer who incurs the repair expenditure.

An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income.

It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit-yielding structure. It is capital expenditure and is not deductible under section 25-10 of the ITAA 1997.

The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition, but before the repair expenditure is incurred.

An initial repair, however, can be apportioned to allow a deduction under 25-10 of the ITAA 1997 of any part of the expense that remedies deterioration arising from the holding of the property by a taxpayer for income purposes after it was acquired (see paragraphs 63 to 66 of TR 97/23).

Capital works deductions

Division 43 of the ITAA 1997 allows a deduction for capital works in relation to a structural improvement to a residential rental property where the structural improvement was constructed after 26 February 1992. The deduction can be claimed for 40 years from the date construction was completed. The rate of deduction per income year is 2.5%.

Capital works also generally include improvements to buildings (subsection 43-20(1) of the ITAA 1997).

Application to your circumstances

In your case, the works done were undertaken to make good damage or deterioration which merely restored the efficiency and function of the property and did not change its character. The works are therefore correctly characterised as 'repairs'.

The costs of repairs are fully deductible only if they involve the remedying of defects, damage or deterioration wholly attributable to the period in which the property was held by you for income producing purposes.

When you purchased the property, you had a building inspection carried out. The building report identified inherent building defects, and that the damage commenced prior to you acquiring the property and was due to gradual deterioration. Consequently, the works at least partially relate to initial repairs and are capital in nature.

The work to fix the building defects that were in place prior to you acquiring the property will be considered capital expenditure and not deductible under section 25-1. However, rectification of any issues that arose after you acquired the property are non-capital repairs and deductible under section 25-10 and are deductible in the year that the expenses are incurred.

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