Edited version of private advice

Authorisation Number: 1052404286755

Date of advice: 03 June 2025

Ruling

Subject: Rental deductions

Question 1

Are you entitled to claim the expenses you incurred for work carried out on your rental property, due to tenant damage, as repair deductions under section 25-10 of the ITAA 1997?

Answer 1

Yes.

Question 2

Are you entitled to claim the expenses you incurred for electrical work carried out on your rental property, due to tenant damage, as repair deductions under section 25-10 of the ITAA 1997?

Answer 2

No.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You own a rental property at xxxx xxxx xxxx.

The property was purchased on DD MM 19YY.

You are the sole owner of the property.

You added an ensuite in 20YY.

You undertook minor repairs in 20YY prior the property being available for rent.

The property was first made available for rent in MM 20YY.

The property is privately managed.

On DD MM 20YY you discovered the tenants had abandoned the property with unpaid rent and you found extensive damage to the property due to malicious damage caused by the occupants.

The occupants had cladded the roof cavity and installed a floor. The roof cavity was also divided into several spaces and ceiling battens had been either damaged or cut in the installation of the separate "rooms". The electrical wiring at the property had been re-directed for use in carrying out the illegal activity.

The damage was extensive and required substantial restitution work to restore the property to a habitable condition in order re-let the property.

Deep cleaning was required to remove chemical residue in part of the property from the illegal activity.

The damage affected approximately X percent of the ceiling area, and included, all bedrooms, lounge room, kitchen, entrance hall and passageway, bathrooms and an area toward the rear of the building.

In MM 20YY you lodged an insurance claim.

The insurance claim was approved and identified the following a scope of works repairs.

On DD October 20XX you received landlord insurance for the amount of $XX for lost rental income.

On DD MM 20YY you received a cash settlement as property damage compensation for the amount of $xxx,xxx to cover repair costs.

Delays in sourcing tradespeople in the post-COVID period meant the repair works did not commence until MM 20YY.

The total cost of the repairs over the 20YY and 20YY FY amounted to $xx,xxx

The repairs were conducted using like-for-like materials and did not change the property's original character.

Decontamination of the property was not required.

The repairs were undertaken to restore the property so it could be used to produce rental income.

You have used the insurance funds to undertake the repairs to the property.

The property was vacant while the repairs were completed.

The repairs were completed in MM 20YY.

The property has been re-let.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

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, subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature.

The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. FC of T (1965) 115 CLR 58, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

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. Paragraph 15 of the Ruling explains that 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.

TR 97/23 also explains that expenditure for repairs is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety (paragraphs 36-42), or the works provide a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58).

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.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

TR 97/23, at paragraph 55, explains the character of a repair does not necessarily change where an improvement is also carried out at the same time. If some part of a particular job can be identified, separated and considered in isolation as an improvement, then the rest of the work done may still be repairs.

Work carried out on a rental property goes beyond being a 'repair' if it changes the character of the property or does more than restore its efficiency and function. Generally, if the degree of improvement involves renewal or replacement of more than a subsidiary part, or the degree of improvement is more than minor and incidental, the 'repair' expenses are of a capital nature and not deductible under section 25-10 of the ITAA 1997.

Application to your circumstances

In your case, you rented the property in the 20YY income year until MM 20YY when it was discovered that that the property had been used by the tenants for illegal purposes and had caused extensive damage. The works done were undertaken to make good damage or deterioration to your rental property which merely restored the efficiency and function of the property and did not change its character. The expenses also relate to repairs undertaken to restore the property to the state it was in prior to being damaged by tenants. The works are therefore correctly characterised as 'repairs'.

The property is restored to its original condition, function and appearance. The work is not regarded as an improvement. The expenditure incurred is a deductible repair under section 25-10 of the ITAA 1997.

The work is not regarded as capital in nature and is regarded as normal maintenance expenditure. Therefore, a deduction is allowable under section 25-10 of the ITAA 1997.

The cost of repairs are fully deductible only where 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.

The costs associated with the electrical works are not deductible as repairs. They are considered to form part of the fabric of the building and are considered capital works. A capital works deduction is allowed for this expenditure under Division 43 of the ITAA 1997.

You are entitled to a capital works deduction for the cost of the electrical repairs and items under Division 43 of the ITAA 1997 over X years at the rate of X% per annum.

You will still be considered to hold a rental property for income purposes at the time of the repairs even if it was vacant at that time as you have rented the property again when the repairs were completed.

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