Private ruling: Rental deductions
Date of advice: 6 May 2026
Published: 13 July 2026
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Can you immediately deduct expenses you incurred to undertake repairs to damaged and deteriorated parts of your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. Items 1, 2, 3, 7, 8 and 9 are repairs deductible immediately under section 25-10 of the ITAA 1997. | Q2: Can you deduct expenditure for capital works completed at the property under Division 43 of the ITAA 1997? | A2: Yes. The staged drainage program and related costs are capital works under Division 43. Based on the facts, treat items 4, 5, 6 and 10 as capital works (structural drainage improvements and associated preliminaries), deductible at 2.5% p.a., pro-rated from completion dates.

Relevant facts and circumstances: This ruling applies to Taxpayer A and Taxpayer B (jointly referred to as you). On DD MM YYYY, you obtained a pre-purchase inspection report for the property. The report identified no critical safety issues, no major defects, and no evidence of pre-existing drainage problems. The property was assessed as structurally sound. Minor maintenance items were noted (including monitoring moisture risks and minor wood decay). A timber pest inspection found no live termites, but recorded environmental susceptibility factors. On DD MM YYYY, you acquired the property as tenants in common, with Taxpayer A holding a XX interest and Taxpayer B holding a XX% interest. From DD MM YYYY, you rented the property at market rates on an arm's length basis, as assessed by a real estate agent using comparable local rentals. Since then, the property has been continuously rented, with no vacancy, no personal use, and no rent-free occupation. During the relevant income year, you identified ongoing drainage and sewerage issues at the property and engaged licensed contractors to undertake progressive repairs. Works included jetting/CCTV investigations, emergency attendance to sewer overflows, excavation and replacement of blocked or damaged pipe sections, mapping and staged stormwater replacements, and installation of new PVC components, drainage pits, and reinstatement of concrete. You paid all repair expenses on an equal basis. The items you wish to claim are as follows (all amounts are inclusive of GST): • Item 1: Jetting/CCTV inspection - works completed by Company A on DD MM YYYY - total cost $XX • Item 2: Emergency attendance - sewer overflow - works completed by Company B on DD MM YYYY - total cost $XX • Item 3: Localised pipe replacement - kitchen line to gully - works completed by Company B on DD MM YYYY - total cost $XX • Item 4: CCTV/location mapping for staged replacements - works completed by Company B on DD MM YYYY - total cost $XX • Item 5: Stage 1 drainage works (deposit) - works completed by Company A on DD MM YYYY - total cost $XX • Item 6: Stage 1 balance and variation - channel drain - works completed by Company A on DD MM YYYY - total cost $XX • Item 7: Stage 2 drainage works (deposit) - works completed by Company A on DD MM YYYY - total cost $XX • Item 8: Stage 2 balance - completion - works completed by Company A on DD MM YYYY - total cost $XX • Item 9: Jetting/CCTV - surcharging sewer gully/main - works completed by Company A on DD MM YYYY - total cost $XX • Item 10: Final claim and rock excavation variation - works completed by Company A on DD MM YYYY - total cost $XX You incurred a total expenditure of $XX (GST inclusive) for these works. The repairs targeted only the sections of the piping system that were blocked or broken, as confirmed by CCTV inspection. The entire system was not replaced. Stage 2 was confined to a damaged section on a separate stormwater run and did not involve replacement of intact or functioning pipes elsewhere.

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

Reasons for decision: Summary: Section 25-10 of the ITAA 1997 allows an immediate deduction for repairs to income-producing premises, but not where the cost is capital. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) distinguishes repairs to parts and renewal of an entirety. Items 1, 2, 3, 7, 8 and 9 were incurred while the property was rented and involved clearing/diagnosing blockages and localised rectification of damaged drainage/sewer components to restore normal function, not replacing the whole system or making a substantial improvement (PVC used as a practical modern equivalent). Therefore, Items 1, 2, 3, 7, 8 and 9 are deductible under section 25-10. Claims are limited to your legal ownership interests and are apportioned on that basis under Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co- owners (TR 93/32 ) , even if you funded the costs differently, even if you funded the costs differently. | Detailed Reasoning - Immediate deduction: 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, or relate to the earning of exempt income. Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) does not allow a deduction for repairs where the expenditure is of a capital nature. | Detailed Reasoning - What is a repair and when is it capital?: TR 97/23 explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. TR 97/23 defines 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. TR 97/23 distinguishes repairs from renewal or reconstruction by reference to the "entirety" concept. A repair is the restoration of property by renewal or replacement of subsidiary parts of a whole, whereas renewal or reconstruction is restoration of the entirety (the whole or substantially the whole of the relevant item), which is capital in nature. Paragraphs 36-39 of the TR 97/23 set out the repair versus either renewal or reconstruction distinction by reference to the entirety concept. TR 97/23 explains that a repair is the restoration of property by renewal or replacement of subsidiary parts of a whole, whereas renewal or reconstruction is restoration of the entirety (the whole or substantially the whole of the relevant item), which is capital in nature. The entirety is the relevant unit of property that is the principal item under discussion (that is, the separately identifiable item to which the work relates). Whether something is a subsidiary part or an entirety does not turn on a single decisive test, it is determined by a practical assessment of all the circumstances. TR 97/23 also recognises that multiple works over time can remain deductible repairs where they amount to a progressive restoration of subsidiary parts, rather than (in substance) a reconstruction of the whole. Relevant indicators include the scale of the work relative to the property, the time period over which it occurs, and whether it is carried out as part of an ongoing program or as a single operation. TR 97/23 acknowledges that using more modern materials or components can still be consistent with a repair where the work restores function and any improvement is minor and incidental, without changing the character of the property. | Detailed Reasoning - Co-ownership: Where a rental property is co-owned and the activities do not amount to carrying on a rental property business, TR 93/32 provides that the net rental income or loss (and associated deductions) is generally divided between the co-owners according to their legal interests in the property. In those circumstances, private arrangements between co-owners about who will pay expenses or how amounts will be shared do not usually change the tax outcome, except in the limited case where there is sufficient evidence that the owners' equitable interests differ from the legal title. | Detailed Reasoning - Applications to your circumstances: In your circumstances, the expenditure was incurred while the property was being used to produce assessable rental income (it has been rented at market rates on an arm's length basis from DD MM YYYY with no private use). The amounts in Items 1, 2, 3, 7, 8 and 9 relate to work undertaken to remedy blockages, root ingress and localised damage in the existing sewerage or drainage lines and to restore the system's efficiency of function. The repairs targeted only the sections of the piping system that were blocked or broken, as confirmed by CCTV inspection. Items 7 and 8 relate to Stage 2 works that were confined solely to a damaged section of clay pipe on the north-west side of the property. Those works involved excavating only the affected area, removing the failed section and reinstating that specific portion with PVC to restore drainage. No intact or functioning clay pipes elsewhere on the property were replaced as part of Stage 2. Stage 1 and Stage 2 were not part of a single continuous pipe system. They related to two separate stormwater drainage runs located on different sides of the property. The work was confined to defective sections identified by jetting or CCTV and involved clearing blockages and replacing only the damaged component(s) necessary to reinstate normal function, rather than replacing or reconstructing the drainage or sewerage system as a whole. The use of PVC does not of itself make the expenditure capital where it is a modern equivalent adopted for practical and compliance reasons and the work simply restores the original function without producing a substantial improvement. While some preliminary costs may form part of construction expenditure where they are incurred to plan and carry out capital works, the jetting or CCTV in Items 1 and 9 were undertaken to clear operational blockages and identify defects for restoration of function. It is distinct from item 4, which relates to locating or mapping for the staged structural drainage works treated as capital works under Division 43. To the extent any part of Items 1 or 9 was incurred specifically to scope or plan the capital works program, that portion would be included in the Division 43 construction expenditure pool rather than being immediately deductible. Accordingly, Items 1, 2, 3, 7, 8 and 9 are deductible under section 25-10 of the ITAA 1997 as repairs to income producing premises. Any deductible amounts are claimed in proportion to your legal ownership interests. | Summary: Division 43 of the ITAA 1997 allows deductions for capital works (including structural improvements) used to produce assessable income, calculated on construction expenditure and generally claimed at 2.5% p.a. for residential property, starting only once construction is complete (with pro-rating by days where relevant). In your circumstances, Items 4, 5, 6 and 10 form part of the staged drainage program and are properly treated as structural drainage capital works, therefore deductible under Division 43 at 2.5% p.a., pro-rated from the relevant completion dates, and apportioned according to your legal ownership interests. | Detailed Reasoning - Capital works: Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. The following are examples of expenses which are capital, or are 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. The rate of deduction for capital works for a residential property is 2.5% of construction expenditure over 40 years. | Detailed Reasoning - Construction expenditure and timing: The Division 43 deduction is calculated by reference to construction expenditure, which can include certain preliminary expenses and structural costs that are integral to the capital works. A deduction is not available for any period before construction is complete, and the deduction is generally apportioned by days from the time the completed works are used (or held ready for use) for income-producing purposes. | Detailed Reasoning - Application to your circumstances: In your circumstances, the property has been used to produce assessable rental income. Accordingly, where the expenditure is properly characterised as capital works, Division 43 applies to allow a deduction over time once the relevant works are completed and used (or held ready for use) in a deductible way. Items 4, 5, 6 and 10 relate to the staged drainage program and associated works that have the characteristics of structural improvements. These include construction-type activity integrated with the property, such as excavation (including rock excavation), installation of drainage infrastructure (including pits and channel drainage), and reinforced concrete reinstatement. These works provide an enduring structural drainage benefit and are properly treated as capital works. Item 4 (CCTV/location mapping) is capital to the extent it was incurred to scope or design and deliver of those structural improvements and therefore forms part of the Division 43 construction expenditure base for the staged works. Accordingly, you may claim a Division 43 deduction at 2.5% per annum, pro-rated from the respective completion dates of the capital works, in accordance with the statutory calculation approach (including no claim before completion). Your claim is limited to your respective legal ownership interests in the property, and apportionment is determined on that basis consistent with TR 93/32.