Private ruling: Rental income
Date of advice: 16 July 2025
Published: 8 September 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the costs you incurred for the work completed on your damaged rental property roof deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are the costs you incurred to remove asbestos from your rental property roof removal deductible under section 25-10 of the ITAA 1997? | A2: Yes. | Q3: Is the insurance payout you received to pay for the work completed on your damaged rental property roof assessable as ordinary income under section 6-5 of the ITAA 1997? | A3: No. | Q4: Is the insurance payout you received to pay for the work completed on your damaged rental property roof an assessable recoupment under section 20-20 of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: You own a rental property. On XX 20XX, while tenanted, the roof of the rental property was significantly damaged during severe weather event. On XX 20XX, the tenant moved out from the property and you lodged an insurance claim. On XX 20XX, the builder inspection officer advised that the asbestos roof sheeting had been badly scuffed as the result of hail impact. They recommended to replace the entire roof. You replaced the damaged asbestos roof with a XX roof. On XX 20XX, you received $XXXX from the insurance company in settlement for replacing the roof. On XX 20XX, you signed the contract with the builder to replace the roof. On XX 20XX, the builder completed the job at a total cost of $XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 section 25-10

Reasons for decision: Summary: You can deduct the costs to replace the roof under section 25-10 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises that you held or used solely for the purpose of producing assessable income. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which deductions for repairs are allowable under section 25-10 of the ITAA 1997. Paragraph 13 of TR 97/23 provides the meaning of 'repairs' as the remedying or making good of defects in, damage to, or deterioration of, property to be repaired. Paragraph 48 to 52 of TR 97/23 explains that if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. | Detailed Reasoning - Application to your circumstances: Your rental property roof which contained asbestos was damaged by a severe weather event. You incurred costs to repair and replace the asbestos roof with a XX roof. Therefore, you can deduct the costs to replace the roof under section 25-10 of ITAA 1997. | Summary: You can deduct the cost to remove the asbestos roof under section 25-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Paragraph 26 of TR 97/23 provides work done to property in controlling health risks associated with the use of asbestos will qualify as a 'repair' where the work remedies or makes good defects in, damage to, or deterioration of, the property. | Detailed Reasoning - Application to your circumstances: Your rental property asbestos roof sheeting was damaged by the hail impact. You removed the asbestos roof to make good defects in the property. Therefore, you can deduct the cost to remove the asbestos roof under section 25-10 of the ITAA 1997. | Summary: The insurance payout is not ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal service, income from property and income from carrying on a business. | Detailed Reasoning - Application to your circumstances: You received payment from the insurance company to remedy the damaged roof. It is not related to personal service, business activity, or compensation for loss of rental income. Therefore, the insurance payout is not ordinary income under section 6-5 of the ITAA 1997. | Summary: The insurance payout you received is an assessable recoupment under section 20-20 of the ITAA 1997 and forms part of your assessable income. | Detailed Reasoning - Detailed reasoning: Subsection 6-10(2) of the ITAA 1997 provides amounts that are not ordinary income but are included in your assessable income by provisions about assessable income, are called statutory income. Section 10-5 of the ITAA 1997 lists the provisions dealing with statutory income. Treatment of recoupments is explained in Subdivision 20-A. Subsection 20-20(2) of the ITAA 1997 states an amount received as a recoupment of a loss or outgoing is an assessable recoupment if: (a) you received the amount by way of insurance or indemnity; and (b) you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act. | Detailed Reasoning - Application to your circumstance: You received the insurance payout to compensate you for deductible repairs to your rental property. Therefore, it is an assessable recoupment under section 20-20 of the ITAA 1997 and forms part of your assessable income.