Private ruling: Rental Deduction
Date of advice: 23 September 2025
Published: 24 November 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the amount incurred to common areas considered repair expenses for deduction in the year incurred? | A1: No | Q2: Is the amount incurred to common area considered a capital improvement and claimable on sale of the property? | A2: Yes

Relevant facts and circumstances: The building was constructed in 20XX. The unit was purchased XX XXX 20XX and was your primary residence until first leased on XX XXX 20XX. The building had existing major defects when you purchased it and the Body Corporation had been seeking remediation for a long period of time. Remediation is to commence in the near future as all lot owners have voted for repairs are to be completed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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. Under section 8-1 of the ITAA 1997 body corporate fee and charges may be claimed as a deduction for rental properties. Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance, or they may be applied for a special purpose fund. Payments you make to body corporate administration funds and general-purpose sinking funds are considered payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time they are incurred. However, if you are required by the body corporate to pay a special levy to pay for a particular capital expenditure, these levies are not deductible. This is the case whether that special levy is paid into a special purpose fund or as a special contribution to a general-purpose sinking fund. | Detailed Reasoning - Repairs: Section 25-10 of the ITAA 1997 provides that expenditure incurred by you for repairs to any premises, or part of premises, held or used by you solely for the purpose of producing assessable income is an allowable deduction. If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances. However, a deduction is not allowable if the expenditure is of a capital nature, for example, an initial repair. Taxation Ruling 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: • 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 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). 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. Subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. The following are examples of expenses which are capital or of a capital nature: • replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator) • improvements, renovations, extensions and alterations, and • initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you acquired. Initial repair expenditure relates to the establishment of the profit - yielding structure. 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. TR 93/23 Paragraph 61 specifically considers the fact of whether a taxpayer was not aware of the need for repairs at the time of purchase. 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. 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 - 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). | Detailed Reasoning - Application to your circumstances: The documentation provided indicates that the repair works are being undertaken to rectify defects that existed prior to the time you acquired the unit. Consequently, the remediation works are related to initial repairs and are capital in nature. The associated special purpose levy contribution is not a deductible expense under section 25-10 of the ITAA 1997. This amount can be deducted as a capital works deduction. The initial repair expense incurred will form part of the asset's cost base for capital gains tax on the sale of the property. You can find further information on our ATO website and search QC 66023.