Private ruling: Rental deductions
Date of advice: 13 April 2026
Published: 29 June 2026
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the replacement of the downstairs bedroom concrete floor an allowable deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year incurred? | A1: No. | Q2: Is the lowering of the surface water drainage system along the northern boundary an allowable deduction under section 25-10 of the ITAA 1997 in the year incurred? | A2: No. | Q3: Is the external waterproofing of the downstairs bedroom walls an allowable deduction under section 25-10 of the ITAA 1997 in the year incurred? | A3: No.

Relevant facts and circumstances: The property was purchased by you to use as your main residence. The contract of sale was signed several years ago. Settlement took place in the month after the contract was signed. You moved out of the property and moved to City Z. You commenced listing the property for rent. The tenants commenced renting the property. In the period between when you moved out of the property and when the property was tenanted, it remained vacant with slow moving renovations occurring throughout this period. Water entered the downstairs room on a number of occasions. An insurance claim was lodged. Services were engaged to undertake rectification works. A formal building contract was signed. The Claim report recommended that slab movement concerns be addressed if flooring replacement was to occur, and suggested drainage improvements to mitigate future water ingress. The room slab was discovered to be extensively cracked once carpet was removed. The slab was replaced including structural reinforcement, waterproofing, termite barrier measures, and related finishing works. The drainage system was lowered and upgraded to divert water away from the dwelling. Works included excavation, earthworks reshaping, new stormwater piping, pits, and reconnection of downpipes. The builder identified that the existing waterproofing method being typical of earlier brick construction that may not provide adequate protection during prolonged rainfall events. Works included sealing mortar cracks, repairing brickwork and concrete areas, installing flashing, resealing windows, treating rust, and painting external brickwork. Replacement carpet was supplied and installed separately by the insurer. You supplied the Commissioner with a number of documents. An insurance assessment report provides, the weather events did not cause the concrete to crack and the damage was pre-existing.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 43-70

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 premises, or a part of the premises, used solely for income-producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs that are considered capital expenditure. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the ITAAA 1997. | Detailed Reasoning - Initial repair: Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition of property (that is, an initial repair) are dealt with in this ruling. Paragraph 4 of TR 97/23 states the expression '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, which existed when the property was acquired from another person (whether by purchase, lease or licence); and has not arisen from the operations of the taxpayer who incurs the repair expenditure. Paragraph 5 of TR 97/23 goes on to state that a repair is not an 'initial repair' simply because it is the first repair made after property is acquired. It is an 'initial repair' if repair is due when the property is acquired in the sense that the property has defects, damage or deterioration or is not in good order and suitable for use in the way intended. Paragraphs 59 to 61 in TR 97/23 goes on to state why initial repairs are of a capital nature and therefore not deductible. The paragraphs state: 59. Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer. 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: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs. 60. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. 61. 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. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes) [1972] 1 All ER 681 is not authority in Australia for a contrary view. 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. Application to your circumstances The replacement of the downstairs concrete floor is not an allowable deduction under section 25-10 of the ITAA 1997. In accordance with the insurance assessment report, the weather events did not cause the concrete to crack and the damage was pre-existing. The expense relating to the downstairs floor is a capital amount and not an allowable immediate deduction. While we consider the expense is capital and initial repairs in nature, you may be able to claim deductions for capital works for it, for similar reasons as discussed below. | Detailed Reasoning - Deductions for capital works: Taxation Ruling TR 97/25 Property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements, discusses the deductibility of capital expenditure. Where a capital work is used in the production of your assessable income, Division 43 of the ITAA 1997 allows you to claim a progressive deduction for the cost of the capital work and provides for a deduction for certain types of construction expenditure. Construction expenditure is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of capital works. Construction expenditure includes: • preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits • cost of structural features that are an integral part of the income producing buildings or income producing structural improvements, such as atriums and lift wells • a portion of indirect costs, such as the cost of facilities for construction workers An item is more likely to be considered a capital work where it: • forms part of the fabric of the building • does not perform a function which is independent from the general function of the building • has the purpose of making the building or structure complete The following factors need to be considered together when determining whether an item is part of the premises or setting: • whether the item appears visually to retain a separate identity • the degree of permanence with which it is attached to the premises • the incompleteness of the structure without it • the extent to which it was intended to be permanent or • whether it was likely to be replaced within a relatively short period. Examples • Wall and floor tiles are generally fixed to the premises, not freestanding, and intended to remain in place for a substantial period of time. They will generally form part of the premises. Expenditure on these items falls under capital works. • Kitchens are fixed to the premises, are intended to remain in place indefinitely and are necessary to complete the premises. Any separate visual identity they have is outweighed by the other factors. They are therefore part of the premises. Clothes hoists are also part of the premises for similar reasons. • Insulation batts, although generally not fixed, are intended to remain in place indefinitely, do not have a separate visual identity and add to the completeness of the structure. They are also part of the premises. In the case of residential rental properties, the capital expenditure deduction is: • generally spread over a period of 25 or 40 years • limited to 100% of the construction expenditure • not allowable until the construction is completed • may only be claimed for the period during the year a property is rented or available for rent Where the capital work is undertaken on residential rental properties after 15 September 1987, the cost of the capital work will be spread over a period of 40 years at a flat rate of 2.5% per year. Application to your circumstances The lowering of the surface water drainage system and external waterproofing of the downstairs walls are considered to be capital works and are not an allowable immediate deduction under section 25-10 of the ITAA 1997. Therefore, a 2.5% per year capital works deduction is allowed under Division 43 of the ITAA 1997 over a 40-year period, commencing on the date the work was completed on the rental property. Consequently, the concrete floor, lowering of the surface water drainage system and external waterproofing of the downstairs room are capital expenses and not an allowable immediate deduction.