Private ruling: Rental deductions - repairs vs capital works
Date of advice: 21 July 2025
Published: 15 September 2025
Ruling period: DDMMYYYY
Date scheme commenced: DDMMYYYY

Ruling: Q1: Is the restoration work to the collapsed drainage system considered a repair and therefore an allowable deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Property address - the Property. You have lived in the Property for over XX years with no previous issues. Your house on the Property is built in the middle of a steep hill. The granny flat was built around XX years ago, has been tenanted for the last X years and occupied the entire time during this period. Prior to the granny flat being built, a working drain existed, the drain ran along the back of the flat and neighbours. Water coming down from the hill above would run through the neighbour's property, into the drain and diverted out to the road. A second drain, located in front of the granny flat, and connected to the main residence drainage system would collect other surface water runoff and water from the roof gutters. The whole drainage system was working reasonably until the granny flat was built. You noticed some water ingress in the years following the granny flat being built however, were not concerned at first, until the amount of water coming through increased and became an issue. In your house there was some water ingress as early as X-X years particularly in heavy storms, however, this worsened over the past year when City A experienced a deluge of continuous rain, and you found you were mopping up and pushing water out of your basement day after day. You were exhausted and tired, dealing with water issues that you were not used to, you decided that the problem was not going away and engaged a plumber to quote and address the problem. You showed the plumber the location of the previously existing drainage system at the front and back of the granny flat which handled the water coming from the hill and diverted the water back into the street. The plumber advised when the granny flat was built a lot of earthworks took place and parts of the rear channel drain were broken and overturned. A section of the drainage at the front of the granny flat was found broken and needed replacing. The plumber advised they needed several weeks to manually dig up and restore the rear drain to its previous working condition and connect it to the pipe leading to the street so that water could be correctly diverted again. The plumber also advised that part of the drainage pipe in front of the flat needed replacement as it was broken and leaking. The plumber advised there was no room to bring in heavy machinery to help, they were worried this would damage the foundations of the main residence and the granny flat. Much of the job would be very labour intensive as the digging was to be done manually. The plumber repaired and restored the drainage system back to working order, at the front and back of the granny flat in the same configuration that previously existed, and water is now being diverted properly again into the street. The issues that you have had with the water and flooding did not exist prior to the granny flat being built. You have provided the plumbers quote and invoice as evidence of the work completed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 8-1

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 a repair expense you must be using the property for the purpose of gaining or producing assessable income and the expenses must not be capital in nature. The cost of repairs are deductible when they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs when the property is rented or genuinely available for rent or to defects that emerge suddenly during that period. 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 is the case if the work carried out is: • an 'improvement' rather than a 'repair', or • an 'initial' repair Repairs must directly relate to wear and tear or other damage whilst you were renting the property. Any repairs that are completed for remedying damage that existed when you acquired the property are 'initial repairs' and are capital in nature. Examples of repairs you can claim immediately are: • replacing a cracked pane • of glass in a window • replacing part of the gutter • replace part of a fence • repairing electrical appliances or machinery If you make repairs and improvements to your property at the same time, you can only claim a deduction for the cost of repairs if you can separate the cost of the repairs from the cost of the improvements. An improvement is anything that makes that part of the property better, more valuable, more desirable or changes the character of the item that is being worked on. Taxation Ruling (TR) 97/23 income tax: deductions for repairs 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 initial repair. The meaning of repairs The term repairs is not defined in section 25-10 of the ITAA 1997. Therefore, it is necessary to look at its ordinary meaning. Paragraph 13 Taxation Ruling (TR) 97/23 advises the following: The word repairs has its ordinary meaning. Ordinarily it means the remedying or making good of defects in, damage to or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. At paragraph 44 of TR 97/23 the ruling goes on to state: In the case of repair, broadly speaking, the work restores the efficiency of the property without changing its character... Improvement or repair When work is done to restore or fix a damaged item, we need to determine if the work undertaken is a repair or an improvement. Repairs generally restore the item to its former function and efficiency whereas improvements increase an items functionality and/or efficiency. A repair may increase the items efficiency slightly and still be classed as a repair. As stated in paragraph 16 of TR 97/23: A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, where the item's function or efficiency is improved substantially or the work changes the function of the item, the work is considered to be an improvement and capital in nature. Initial repairs TR 97/23 states that expenditure incurred to remedy defects in, damage to, or deterioration of a rental property is an 'initial' repair' if the defect, damage or deterioration: • existed at the time of acquisition, and • did not arise from the income producing operations of the owner of the property However, TR 97/23 specifies that the main consideration in determining whether work carried out is an 'initial repair' is the appearance, form, state, condition and functional efficiency of a property at the time of the acquisition. A repair carried out after the acquisition of a property will be an 'initial repair' if the repair was due when the property was acquired, in the sense that there was a need for the repair to restore or maintain the property's efficiency of function at the time of acquisition. In other words, if a property is neither in good order when it was acquired, nor suitable for use for the intended income producing purposes, then repairs carried out after the acquisition may be properly characterised as 'initial repairs'. Application to your circumstances In your case, you built a granny flat approximately XXX and XXX years ago which has been rented for the last XXX years and occupied the entire time during this period. Your house (the Property) is built on a steep hill and prior to the flat being built a working drain existed to divert water away from the Property and into the street. You noticed some water ingress in the past 4-5 years in your basement, since the flat has been built, however, this worsened over the past 12 months due to heavy rain and a deluge of continuous rain. You found you were mopping up and pushing water out daily. You engaged a plumber to attend the Property and address the problem. The plumber advised you when the flat was built, a lot of earthworks took place and damaged was caused to parts of the rear channel drain, advising they were broken and overturned. A section of the drain at the front of the flat was broken and needed replacing. The drainage system was repaired and restored back to working order at the front and rear of the flat. Water is now being diverted properly again into the street. The repairs you incurred for the restoration of the damaged pipes to the front and rear of the flat are not classed as an improvement, initial repair or capital work. In applying this to your circumstances, the Commissioner considers that the restoration work to the damaged and broken pipes is an allowable repair deduction under section 25-10 of the ITAA 1997.