Private ruling: Rental deductions - repairs versus improvements
Date of advice: 7 November 2025
Published: 5 January 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 29 July 20XX

Ruling: Q1: Can you claim a deduction for the repair work completed in your investment property to remedy the reported water damage that occurred to the shower wall and base, tiling, grout work, including gyprock sheeting, paintwork, tiling in laundry and timber framing to the adjoining hallway and laundry wall and related labour costs? | A1: Yes. | Q2: Can you claim an immediate repair deduction for the remainder of the work completed in your investment property to replace capital items such as the new lighting, mirror, exhaust fan, towel rack, new tapware, installation and pipe modification for bath, tiling outside of the shower area in the bathroom and apportioning of labour costs to modify pipes and instal the vanity? | A2: No.

Relevant facts and circumstances: Property at XXX was purchased XX XXX 20XX by yourself and XXX XXX (spouse) as joint tenants. The property has been rented since XX XXX 20XX. In XXX 20XX you and your spouse engaged Company A to degrout, regrout, retile and install a new shower screen. In XXX 20XX the tenants reported an issue with water damage occurring in the bathroom. In XXX 20XX Company A returned, inspected and completed warranty repairs. In XXX 20XX Company B was engaged to inspect and provided a report in respect of the shower, hallway and laundry walls due to water ingress. A copy of the report issued by Company B found issues relating to water ingress from damage caused by Company A which resulted in damage to the shower hob, walls on two sides of the shower recess, hallway and laundry. Company B commenced works on the bathroom on XX XXX 20XX addressing all issues identified in the report. During the works it was identified further damage to timbers in the shower area and termite damage which was fixed during the works. Company B issued invoices for $XX,XXX.XX and $X,XXX.XX detailing all works completed and materials supplied. Repairs were completed to the shower area and hallway and laundry walls. During the repairs Company B also installed a new vanity, bath, mirror, towel rack, tiles, paints, lighting, exhaust fan, tiling outside of the shower area in the bathroom and pipe modification for the vanity and bath.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act (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. | 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 or a capital improvement. Taxation Ruling TR 97/23 Income tax: deductions for repairs 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 - Deduction for capital works: The capital works provisions allow a deduction for certain capital expenditure on the construction of buildings and other capital works which are used for the purpose of producing assessable income. Eligible construction expenditure is written off over a number of years. Division 43 of the ITAA 1997 applies to capital works being certain buildings, and also capital works for structural improvements begun after 26 February 1992. Examples of structural improvements include major renovations to a room. The expenditure on the bathroom aside from the repair of the shower recess and the surrounding water ingress is therefore subject to the capital works provisions. The following paragraphs of TR 97/23 are referenced: 47. Replacement or substantial reconstruction of the entirety, as distinct from the subsidiary parts of the whole, is an improvement. | Detailed Reasoning - Repairs done at the same time as improvements: 55. The character of a repair does not necessarily change because it is carried out at the same time as an improvement. If, for example, a shopping centre is extensively renovated or restored (the project combining repairs and improvements) and if some parts of the project can be effectively separated and considered in isolation from the rest of the project, they may still be repairs. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. It is not appropriate to have regard only to the result of the entire work done. It is inappropriate to regard the whole project as an affair of capital. In other words, if individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements. 56. 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, we regard the cost of the entire work as being of a capital nature and not deductible. 57. For example, if work normally regarded as a repair, such as painting, is done to property as part of, or in conjunction with, a reconstruction and modernisation of the property, and it cannot be segregated and its cost separately quantified, it may not be deductible. It is again a question of fact and degree 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). The amount you can deduct is a portion of your construction expenditure. In the case of structural improvements begun after 26 February 1992 the rate of deduction is 2.5%. However, not more than 100% of your construction expenditure can be deducted. This imposes a time limit on the period over which your construction expenditure can be deducted. | Detailed Reasoning - Application to your situation: While some of the expenses cover the whole of the area of the bathroom you can only claim as an immediate deduction the portion which is related to the repair of the shower recess, and the impacted hallway and laundry walls due to ingress of water from the shower. The balance of the expense is a capital works improvement of the bathroom and is deductible at 2.5% over a period of 40 years but not exceeding the construction cost. The part of the works relating to the labour cost will need to be apportioned between the repair of the shower recess and impacted hallway and laundry walls and the improvement to the remainder of the bathroom on a reasonable basis. The capital works expense incurred will form part of the asset's cost base for capital gains tax on the sale of the property (reduced by any tax deduction already claimed). You can find further information on Cost base adjustment for capital works on our ATO website ato.gov.au and search QC 66023 or search QC 104872 for the Rental properties guide 2025.