Private ruling: Repair - rental property
Date of advice: 3 June 2026
Published: 17 August 2026
Ruling period: Income year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the amount incurred on works to the Property deductible as repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, but the work undertaken to address the lack of articulation joints is capital expenditure and is not deductible under section 25-10 of the ITAA 1997 | Q2: Alternatively, to the extent any discrete elements are found to be capital in nature, whether they are eligible for deduction under Division 43 of the ITAA 1997 (Capital works) at the statutory rates? | A2: Yes.

Relevant facts and circumstances: 1. The Property was purchased by the Taxpayer as a newly completed build. 2. The Property was first rented to tenants shortly after purchase. 3. The Property was held and used to derive assessable rental income during the income year ended 30 June 20YY. 4. During that period, structural damage was discovered throughout the Property, including cracking to walls and ceiling in various rooms, cracking to parts of external rendered masonry and brick walls, roof drainage, moisture damage to part of the ceiling, and blistering paint. The damage was suspected to have been caused by a storm or land slip, prompting the Taxpayer to lodge an insurance claim under the Property's policy. 5. The insurer commissioned an engineering investigation report (Engineering Report) for the Property to determine both the cause and extent of the damage. After reviewing the Engineering Report, the insurer denied the claim. 6. The Engineering Report stated that a cause of the damage was a lack of articulation joints. 7. Following the denial of the insurance claim, the Taxpayer engaged contractors directly, proceeding with repairs in accordance with the recommendations set out in the Engineering Report. 8. A tender agreement was executed to complete the works. 9. The scope of the works was subsequently refined so that only essential rectification works necessary to restore the Property were undertaken. 10. The works included replacing of Gyprock, render and waterproofing, and painting. The work undertaken were only to the parts of the Property damaged. The work undertaken also rectified the lack of articulation joints.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 43-20 | Income Tax Assessment Act 1997 section 43-25 | Income Tax Assessment Act 1997 section 43-140 | Income Tax Assessment Act 1997 section 43-145

Reasons for decision: Summary: Questions 1 and 2 | Detailed Reasoning - Detailed reasoning: Subsection 25-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that 'you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income'. Subsection 25-10(3) of the ITAA 1997 states that 'you cannot deduct capital expenditure under this section'. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which deductions are allowable under section 25-10 of the ITAA 1997, and states the following about the meaning of repair: 13. The word 'repairs' has its ordinary meaning. It ordinarily 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. 14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property. 15. Repair for the most part is occasional and partial. It 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. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. What is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. 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. As mentioned above, subsection 25-10(3) of the ITAA 1997 will not allow expenditure to be deducted if they are of a capital nature. The following are examples of expenses which are capital or capital in 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. Improvement or repair TR 97/23 provides the following about distinguishing between a repair and an improvement: 44. ... In the case of a 'repair', broadly speaking, 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 - usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. 45. To distinguish between a 'repair' and an 'improvement' to property, one needs to consider the effect that the work done on the property has on its efficiency of function. This is the determinative test... 124. Relevant considerations, consistently with the approach taken by the High Court in the W Thomas & Co case and the Western Suburbs Cinemas case, in distinguishing generally between a repair and an improvement, are: (a) whether or not the thing replaced or renewed was a major and important part of the structure of the property (at 86 CLR 106; 9 ATD 454); (b) whether the work performed did more than meet the need for restoration of efficiency of function (at 86 CLR 106; 9 ATD 454 and at 115 CLR 72; 14 ATD 87), bearing in mind that 'repair' involves a restoration of a thing to a condition it formerly had without changing its character; (c) whether the thing was replaced with a new and better one (at 86 CLR 106; 9 ATD 454); and (d) whether the new thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future (at 86 CLR 106; 9 ATD 454). If individual parts of the total project involving an extensive renovation or restoration can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible under section 25-10 of the ITAA 1997. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvement. If, however, repair work is inextricably bound up with work of an improvement nature, and the repair work cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, the cost of the entire work is regarded as being of a capital nature (and not deductible under section 25-10 of the ITAA 1997). Application to your circumstances The works undertaken on the Property were done to rectify damages including cracking to walls and ceiling in various rooms, cracking to parts of external rendered masonry and brick walls, roof drainage, moisture damage to part of the ceiling, and blistering paint. The works included replacing of Gyprock, render and waterproofing, and painting. The work undertaken were only to the parts of the Property damaged. These works have restored the efficiency of function of the parts of the Property worked on and are considered to be repairs for the purposes of section 25-10 of the ITAA 1997. The Engineering Report states that a cause of the damage was a lack of articulation joints. The work undertaken also rectifies the lack of articulation joints. This work addresses the identified construction defect. This work is considered to provide a greater efficiency in the function of the relevant wall(s) and is considered to be an improvement. The work undertaken to address the lack of articulation joints is a capital expenditure and is not deductible under section 25-10 of the ITAA 1997. Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works can be a building, structural improvements, or extensions, alterations or improvements to buildings or structural improvements (section 43-20 of the ITAA 1997). Section 43-25 of the ITAA 1997 allows a rate of deduction of either 2.5% or 4% depending on the use of the building or part of building. The rate of 2.5% will apply if the building was used in producing assessable income (section 43-140 of the ITAA 1997). The rate of 4% only applies if one of the uses described in the table in section 43-145 of the ITA 1997 applies. The uses described in section 43-145 of the ITAA 1997 include as a hotel, motel or guest house, an apartment used to provide short-term accommodation to travellers, or industrial activities. The Property is not used for these purposes, and the rate of 4% will not apply to the capital works. As the Property was used to produce assessable income in the relevant income year, a deduction is allowed at the rate of 2.5% in that year and each subsequent year the Property is used in producing assessable income.