Private ruling: Rental property deductions
Date of advice: 15 August 2025
Published: 20 October 2025
Ruling period: 1 July 20XX to 30 June 20XX | 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim an immediate deduction under either section 8-1 or section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the bathroom works? | A1: No | Q2: Can you claim an immediate deduction under section 25-10 of the ITAA 1997 for the replacement of the rear boundary fence? | A2: Yes | Q3: Can you claim a capital works deduction under Division 43 of the ITAA 1997 for the bathroom works? | A3: Yes

Relevant facts and circumstances: You own a commercial building (the Property). You purchased the Property in 20XX and it was first rented out on in that year. From early 20XX to In early 20XX, builders replaced the original bathroom and constructed a new bathroom including shower, disabled toilet facilities and ancillary works (the bathroom works). The original bathroom was a lean-to attached to the main brick and masonry building, clad in asbestos. In early 20XX, you engaged builders to undertake works at the Property including, the original bathroom which required replacement of the roof, re-tiling and painting. While undertaking the work, the builders discovered that the bathroom's underlying structure and framework, and concrete foundation needed replacing. On Date one, you received a letter from the local council (the Council). In that letter, the Council advised you that they had been made aware that a development had begun at the rear of the Property. The Council advised that no development application had been submitted and that no development approval existed for the commenced works. The Council also advised you that the subject land is in a Historic Conservation Area in which all development requires approval. The Council advised the worker onsite that he should cease work except to finish compacting the base gravel and make the site safe before leaving. Following this visit by the Council, you were advised you needed to replace the original toilet with the modern equivalent of ambulant design, wider access doors and a greater floor area. You were also advised that you would need to have the septic system replaced with a modern equivalent, being a much larger septic system. On Date 2, the original bathroom and rear fence were removed. Following this: • a level pad was supplied and compacted • temporary fencing was erected to establish a building site • a general cleanup of the site • a tree was removed. On Date 3, the Council granted the development approval and building consent. Between Date 4 and Date 5, termite spray, collars and greenzone was applied against the existing building. The concrete slab was poured and reinforcement bar and mesh was installed. The door, windows and brickwork were removed as required. Footings were also dug and underfloor drainage works undertaken. On Date 6, the underfloor, sewer drain and new larger septic tank were supplied and installed. Between Date 7 and Date 8, work was undertaken to construct the new bathroom. A wall and roof frame were constructed and windows, doors, door jams, architraves, quads and hardware were installed. The roof and walls were clad with insulation and lined and fire check sheeting was applied to the boundary wall as required. On Date 9, a new rear boundary fence was installed using repurposed sheets and new sheets as required. From Date 10 to Date 11, lights and power were installed in the new bathroom. On Date 12, power points, down lights, exhaust fans, emergency lighting, exterior sensor lights were wired and installed in the new bathroom. The Property was rented out while the bathroom works were being undertaken. You did not make an insurance claim for the bathroom works. You have provided itemised invoices which list the costs of the bathroom works. You have paid all of the invoices.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | 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 subsection 43-25(1) | Income Tax Assessment Act 1997 section 43-140

Reasons for decision: Summary: You can't claim an immediate deduction under section 8-1 or section 25-10 of the Income Tax Assessment 1997 (ITAA 1997) for the bathroom works. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. There are exceptions where the costs are of a capital, private or domestic nature. Section 25-10 of the ITAA 1997 allows a deduction for expenditure incurred for repairs to premises or part of premises held solely for the purposes of producing assessable income. Subsection 25-10(3) denies a deduction for repairs where the expenditure is of a capital nature. Repairs involve restoring a defective, damaged or deteriorated item to working condition. Repairs generally involve a replacement or renewal of a worn out or broken part. For example, replacing worn or damaged roof tiles or fixing an air conditioner that is no longer working. Examples of expenses that are capital or capital in nature include: • replacement of an entire structure or unit of property such as a complete fence or a building • improvements, renovations, extensions and alterations • initial repairs, for example damage or deterioration that existed at the date you acquired the property Taxation Ruling TR 97/23 Income tax: deductions for repairs discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997. Paragraph 15 of TR 97/23 explains the word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration from: • ordinary wear and tear • accidental or deliberate damage • the operation of natural causes (whether expected or unexpected) | Detailed Reasoning - Entirety: Paragraphs 37 to 42 of TR 97/23 explain what is meant by entirety. The term 'entirety' is used by the court in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' Lindsay v FC of T [1960] 106 CLR 377 at 385; (1960) 12 ATD 197 at 201. Property is more likely to be an entirety, as distinct from a subsidiary part, if: • the property is separately identifiable as a principal item of capital equipment; or • the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or • the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or • the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law. In Case W77 89 ATC 698; (1989) 20 ATR 3888 the owner of a rental property was denied a deduction for remodelling a bathroom, amongst other expenditure. The repair work was required due to the age, deterioration and general wear and tear. It was held that the work done was extensive and could be described as a complete renovation designed to improve the unit rather than simply to restore it. Paragraph 114 of TR 97/23 confirms that renewal, replacement or reconstruction of the entirety (i.e., the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair. In contrast, paragraph 32 of TR 97/23 confirms that work done to restore the property by replacement of a subsidiary part of a whole will maintain its character as a repair. | Detailed Reasoning - Application to your circumstances: In your case, you demolished and replaced the bathroom with a complete new bathroom facility. The bathroom works were extensive and constitute an improvement. You advised that initially the work carried out was to replace the roof, some tiling and painting. The work completed was a demolition and rebuild of a new bathroom. Therefore, the expenditure is capital in nature and is not a deductible repair under section 25-10 of the ITAA 1997. | Summary: You can claim an immediate deduction for the replacement of the rear boundary fence under section 25-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As outlined above, paragraph 32 of TR 97/23 confirms that work done to restore the property by replacement of a subsidiary part of a whole will maintain its character as a repair. The replacement of part of an entire fence will constitute a repair as it is a replacement of a subsidiary part of a whole. | Detailed Reasoning - Application to your circumstances: The replacement of the rear boundary fence restored the function of a part of the whole fence (the entirety). The materials used were those of the original fence, combined with some new materials. The work undertaken merely restored the efficiency of function of the rear boundary fence. Therefore, you can claim an immediate deduction under section 25-10 of the ITAA 1997 for the replacement of the rear boundary fence. | Summary: You can claim a capital works deduction for the bathroom works under Division 43 of the ITAA 1997. | Detailed Reasoning - Capital works: Capital works expenses include: • building and construction costs • alterations to a building • major renovations to a room • substantial renovations to a property • adding a fence • building extensions such as garages and patios • adding structural improvements such as a driveway or retaining wall. Paragraphs 36 to 42 of TR 97/23explain that expenditure incurred to renew or reconstruct an entirety is of a capital nature. Further, paragraphs 44 to 58 explain works that result in a greater efficiency of function in the property represent an 'improvement' rather than a 'repair'. Division 43 of the ITAA 1997 provides a deduction for capital works attributable to a construction expenditure area that is owned or leased by the taxpayer and used during the income year for the purposes of producing assessable income. Section 43-20 of the ITAA 1997 allows a deduction for capital works being a building, or an extension, alteration or improvement to a building. Subsection 43-25(1) of the ITAA 1997 provides the rate of deduction for capital works depending on when they were commenced. | Detailed Reasoning - Application to your circumstances: As explained in Question 1, the work completed was a demolition and rebuild of a new bathroom. Therefore, the bathroom works are classified as an improvement. You can claim a capital works deduction for the bathroom works under Division 43 of the ITAA 1997.