Private ruling: Deductions - repairs
Date of advice: 9 April 2025
Published: 23 June 2025
Ruling period: Year ended DD MM 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Can you claim a deduction in the income year ended 30 June 20XX under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of the roofing work as repairs to your rental property? | A1: No. | Q2: Can you deduct the roofing work for initial repairs to your rental property as a capital works deduction at the rate of 2.5% per income year? | A2: Yes.

Relevant facts and circumstances: You and your spouse acquired the property at XX XX XX XX on DD MM 20YY as joint tenants. You did not obtain a building inspection at the time of purchase. All units of the property were leased at the time of purchase. On DD MM 20XX your property manager provided a work request on unit XX. The report advised damage to the property was getting significantly worse and had been actively leaking causing mould, damage to carpets, ceilings and walls and was a potential health hazard to the occupants. The tenant provided photographs of the reported damage. You sought advice and quotes for roof repair and was advised that, due to the age of the original roof iron sheeting, it was recommended that the roof be replaced rather than damaged sections be repaired. The roofing work was undertaken in MM 20YY. The shape of the roof line was not altered; however, cyclonic upgrades were added during the repair. The cost of the roof replacement, excluding the cost of cyclonic upgrade, was A$XX,XXX. The roofing company undertook the following work: • removal of old roofing iron and associated flashing • installation of Colorbond sheeting and flashing • installation of insulation • cyclonic upgrade to roof structure tie-downs • removal and disposal of all building debris. The work was completed in MM 20YY. You paid an amount of $XX,XXX to the roofing company in two instalments on DD and DD MM 20YY.

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: Summary: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to a rental property. To be eligible to claim such expenses you must be holding the property for the purpose of gaining or producing assessable income, and the expenses must not be capital in nature. 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. However, where an expense for work carried out to a rental property is considered to be capital in nature, no deduction is allowable under section 25-10 of the ITAA 1997. This will be the case if the work carried out is: • an 'improvement' rather than a 'repair', or • an 'initial repair'. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) contains the Australian Taxation Office (ATO) view on the circumstances in which an expense for work carried out on an income producing capital asset (such as a rental property) can be fairly described as a repair expense, as opposed to an expense for an improvement or an initial repair. | Detailed Reasoning - Repairs: TR 97/23 Income tax: deductions for repairs (TR 97/23) provides the Commissioner's view on repairs that are allowable under section 25-10 of the ITAA 1997 and indicates that expenditure for repairs to property is of a capital nature where: (a) The guidelines for distinguishing between capital and revenue outgoings laid down by the courts for the purposes of the forerunners of section 8-1 in such cases as Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; (1938) 5 ATD 87 and Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190 indicate that the expenditure is incurred in establishing, replacing or enlarging the profit-yielding (i.e., business) structure rather being a working or operating expense. (b) The expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety. The application of this distinction depends very much on what, in the circumstances of the case, is properly considered to be the relevant entirety. (c) If property bought for use as a capital asset in the buyer's business is not in good order and suitable for use in the way intended, expenditure incurred in putting it in order suitable for use is part of the cost of its acquisition and is of a capital nature. Repair involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. | Detailed Reasoning - Initial repairs: An initial repair refers to a repair by a taxpayer that remedies some defect in property or makes good damage to, or deterioration of, property being a defect, damage or deterioration existing when the property was acquired, and not arising from the operations of the taxpayer who incurs the repair expenditure (see paragraphs 59 to 61 of TR 97/23). 59. Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer. 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: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs. 60. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. 61. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes) [1972] 1 All ER 681 is not authority in Australia for a contrary view. 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. 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. As stated in paragraph 61 of TR 97/23, 'it is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair'. 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. | Detailed Reasoning - Remedial works - initial repairs.: If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. An initial repair 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). | Detailed Reasoning - 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%. | Detailed Reasoning - Application to your circumstances: You purchased the property in MM 20YY and all XX units were rented at the time. You did not obtain a building inspection at the time of purchase. In MM 20YY the property manager provided a work request lodged by the tenants of unit XX reporting leaks and mould. The property manager advised in the report that the damage was getting significantly worse and had been actively leaking causing mould, damage to carpets, ceilings and walls and was a potential health hazard to the occupants. You sought quotes and advice regarding the property's roof. You were advised that given the condition of the roof, it was recommended that a full re-roof of the property was required and that adverse weather events early in the year had further caused the roof structure to decay rapidly and needed replacing with a building compliant product. In your case, the works done were undertaken to restore the efficiency and function of the property and did not change its character. The works are therefore correctly characterised as 'repairs'. An initial repair expense can be dissected or apportioned to allow a deduction under section 25-10 of any part of the expense that remedies deterioration arising from the holding, etc., of the property by the taxpayer for income purposes after it was acquired. No dissection or apportionment is available, however, if the repair expenditure is necessitated by a defect or damage to property that existed at the time of acquisition. The documentation you provided indicates that the repair works include the rectification of defects that existed prior to the time you acquired the unit. Consequently, the remediation works 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 unit will be considered capital expenditure and not deductible under section 25-10. However, rectification of any issues that arose after you acquired the unit are non-capital repairs and deductible under section 25-10.