Private ruling: Rental deductions
Date of advice: 18 March 2026
Published: 15 June 2026
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20YY
Date scheme commenced: DD MM YYYY

Ruling: Q1: Can you deduct expenditure you incurred to fix the subfloor in the extension to your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Can you deduct expenditure you incurred for the items that relate to capital works completed at your rental property under Division 43 of the ITAA 1997? | A2: Yes. | Q3: Are you able to immediately deduct under Division 43 of the ITAA 1997 your share of the undeducted amounts of capital expenditure related to the items that were destroyed? | A3: Yes.

Relevant facts and circumstances: In early 19YY, the dwelling at the property was built. Prior to your purchase, the property had been renovated over the years by past owners. The most recent renovation was in YYYY and YYYY by the previous owner adding an extension to the back for new family room, bathroom and laundry from the original house external wall. On DD MM YYYY, you obtained a pre-purchase building and timber pest inspection report for the property. The report stated the following regarding the subfloor: • Vertical clearance low in sections (unreasonable access to these sections). • Visual inspection limited due to storage. The pre-purchase report also stated: • The subfloor ventilation was found to be poor on the day of inspection, strongly recommend improvement to ventilation. Installation of additional vents may be sufficient, however, in some cases mechanical ventilation may be required. • The subfloor drainage was inadequate. Evidence of widespread dampness/stormwater entering and ponding. This can cause subsidence in subfloor structure, recommend seeking further advice from a licensed and practicing plumber. • The property has a high moisture reading. • Conditions conducive to structural damage were detected on the day of inspection. The pre-purchase report stated that due to the level of accessibility for inspection including the presence of obstructions, the overall degree of risk of undetected structural damage and conditions conducive to structural damage was considered moderate to high. A further inspection was strongly recommended of areas that were not readily accessible, and of inaccessible or obstructed areas once access has been provided or the obstruction removed. On DD MM YYYY, you jointly purchased the dwelling at the property and immediately rented it to the previous owners. On DD MM YYYY, you entered a lease with a new tenant. Your agent advised you that during the entry report, it was identified that there was movement in the floor of the part of the property which had been extended. On further inspection, the timber bearers had failed in the subfloor of the rear extension. As a result, the floor had started to drop, and the external south-east wall started to buckle. You hired an engineer to perform a site inspection at the property and make an evaluation of any potential structural issues of the uneven floor due to timber bearer structural integrity failure. The engineer was instructed to provide you a report on the structural integrity of the existing building. On DD MM YYYY, the inspection was carried out by the engineer. On DD MM YYYY, you received an inspection report completed by the engineer which suggested that the extension subfloor failed due to inadequately treated timber, coupled with high moisture levels. The engineer report contained the following observations: • Recognised the age of the property. • The foundation was made up of brick walls, brick piers which were assumed to land on top of the strip footing and pad footing. No damage at all to the underside of the house was found. • The property was built on a slope site which increases stormwater runoff below the surface from surrounding land and the site itself. • Subfloor bearers need to be strong enough to hold the rest of the floor up. It has been noticed onsite a few rotted timber bearers broken or failed at various locations which caused the ground timber floor has significant settlement. The engineer's report identified the cause of the timber's failure and stated: • Deterioration of subfloor timber bearers is generally caused by rot. Normally the perimeter external wall areas are the first to deteriorate as they are more likely to be subject to frequent wetting. • If the timber floor slopes away from the external wall, this indicated that the timber bearers have deteriorated. If there are signs of moisture to the bearers, it should either be jacked up from the support (after cutting any fixings) so damp-proof course can be inserted and the bearer lowered and refixed. However, the existing timber bearers' damage is severe, therefore all the affected bearers should be replaced. The engineer's report listed the potential causes of the rotted timber bearer. • Untreated or inadequately treated timber bearers. • Inadequate drainage. • Lack of floor vents and prevailing moisture exposure. The engineer's report indicated that the floor bearers had been damaged beyond repair from rot and all affected timber bearers shall be replaced. The rental was managed by agent A and later by agent B. On DD MM YYYY, the tenant vacated the property. Factors that influenced the tenant's decision to vacate the property were: • The tenant was unable to remain in the property throughout the repairs because they had XX school aged children and whilst the repairs were in progress they would lose access to the laundry, bathroom, family room and entertainment room of the property. • At the start of the repairs there would be jackhammering to remove the tiled floor which would generate a lot of noise and dust. • Unknown workmen would have access to the property while the tenant's partner and children were alone in the house. The tenant had concerns for their safety and privacy. • The repairs were estimated to take over a month and the tenant felt it was not feasible for them to remain in occupation given the above conditions. For over a month, Company A conducted work on fixing the subfloors. The subfloor in the extension failed due to its materials being unable to tolerate the moisture levels in the subfloor area. The materials used for repair were selected to both remedy the defects and reduce the likelihood of future failure. On DD MM YYYY, Company B performed work on the drainage system. The work undertaken by Company A and Company B consisted of: • Item 1: Propping the roof of the rear extension. • Item 2: Removing the floor tiles and yellow tongue in the family room to access subfloor. • Item 3: Inspecting the state of the subfloor under the entire extension. • Item 4: Removing all bathroom and laundry fixtures and fittings. • Item 5: Stripping internal walls and floors in the bath and laundry. • Item 6: Removal of subfloor joists, bearers and brick piers in the extension. • Item 7: Replacement with steel piers, H4 treated pine bearers, H3 treated pine joists and fibre cement floorboards. • Item 8: Re-sheeting, waterproofing and re-tiling of bath and laundry. • Item 9: Re-installation of previously saved bath and laundry fixtures and fittings. • Item 10: Covering family room floor with hybrid floating floorboards. • Item 11: Replacing the buckled external wall cladding and repainting. • Item 12: Installation of an agi line across the backyard to control water ingress under the house. • Item 13: Digging up a broken terracotta stormwater, pipe and replacement with a PVC pipe. • Item 14: Installation of subfloor ventilation fans. The bathroom and laundry were re-tiled with their previous standard. Original fixtures and fittings were reinstalled. The only improvement was using moisture resistant materials and improving drainage and ventilation to avoid future moisture accumulation. You did not receive an insurance payout related to any of the items. There was no private use or private purpose in holding the property. In early MM YYYY, the property was re-advertised for rent. On DD MM YYYY, you signed a lease agreement with a new tenant.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 subsection 25-10(3) | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 subsection 110-25(5) | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 subsection 43-20(3) | Income Tax Assessment Act 1997 section 43-70 | Income Tax Assessment Act 1997 subsection 43-70(1) | Income Tax Assessment Act 1997 subsection 43-70(2) | Income Tax Assessment Act 1997 section 43-250

Reasons for decision: Summary: No. Items 1 to 9 and Item 13 are considered initial repairs and the need for repairs existed before you purchased the property. You are not entitled to an immediate deduction under section 25-10 of the ITAA 1997. These expenses can be included in the fourth element being a capital cost to preserve the value of your asset. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Section 25-10 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) 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. 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. | Detailed Reasoning - Initial repair: 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. Paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after a rental property is acquired, where the expenses are 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. Paragraph 60 of TR 97/23 states that 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. TR 97/23 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 works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or the work is an initial repair. The leading Australian case in this area is W Thomas & Co Pty Ltd v FC of T (1965) 14 ATD 78; 1965 115 CLR 58. The taxpayer in that case purchased a building, unaware that extensive repairs were needed for the taxpayer to be able to carry on its business as a flour and grain merchant. In due course, the taxpayer carried out those repairs but also altered and enlarged an office and installed a lunchroom and other amenities. Windeyer J said that all the work in question could be fairly described as repairs to the building, to make good the deterioration that has occurred by ordinary wear and tear, or by the operation of natural causes, over a period of time. However, his Honour went on to say (at CLR p 3; ATD p 87) that if a capital asset acquired for use in the taxpayer's business "is not in good order nor suitable for use in the way intended, the cost of putting in order suitable for use is part of the cost of acquisition and not a cost of it maintenance" Accordingly, the expenditure in question was capital expenditure and thus not deductible. It is immaterial that some of the repair work is carried out progressively as the particular property or item is bought into use or that some income us earned from it before the work is carried out (e.g. Case W7, 89 ATC 161). Capital expenditure does not cease to be capital expenditure simply because the work is carried out over a period of weeks or months and paid for it as it is done ( WG Thomas & Co I per Windeyer J at CLR p 74; ATD p 88). It is immaterial whether you were aware of the condition or the need for repair of the property at the time of purchase. Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you 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. | Detailed Reasoning - Cost base: The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when purchased. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. Section 110-25 states that a CGT asset's cost base consists of five elements. These elements are added together to work out the cost base for each CGT asset. Taxation Determination TD 98/19 Income tax: capital gains: may initial repair expenditure incurred after the acquisition of a CGT asset be included in the relevant cost base of the asset? outlines that initial repair expenditure incurred after the acquisition of a CGT asset is included in the fourth element of the cost base and reduced cost base of the asset. The fourth element relates to capital expenditure incurred to preserve the value of your asset as subsection 110-25(5). The expenses will be considered when calculating the capital gain or loss on a CGT asset when it is disposed of in the future. | Detailed Reasoning - Apportionment: Paragraphs 55 to 57 of TR 97/23 cover repairs done at the same time as improvements. The character of a repair does not necessarily change because it is carried out at the same time as an improvement. 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. 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. If 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 form the cost of improvements, we regard the cost of the entire work as being of a capital nature and not deductible. It must be possible to segregate the cost of the repairs actually affected from the capital cost of the improvements. | Detailed Reasoning - Application to your circumstances: Items 1 to 9 and item 13 are considered a repair and not an improvement. The subfloor works undertaken was to restore the original efficiency of function of the foundations to support the extension of the house. The work to the subfloor did not change the nature and character of the property. The works were completed to rectify an issue with the original extension construction. It is considered the subfloor in the extension is only part of the house and does not constitute an entirety. The house itself is the entirety. The need to repair the subfloor arose from defects associated with the extension completed prior to your purchase of the property, rather than from any deterioration caused by tenants while the property was being used to produce assessable income. These works are therefore considered initial repairs, as the defects existed at the time you acquired the property. It is immaterial whether you were aware of those defects or the need for repairs at the time of acquisition. Based on the information provided and applying the relevant legislation and principles to the facts of your situation, it has been determined that the initial repair expenses are not construction expenditure and not deductible under Division 43. Expenditure incurred to remedy defects, damage or deterioration that existed at the date of acquisition are capital in nature. Such costs do not have the necessary connection to the income-producing use of the property and are instead regarded as part of the cost of acquiring the property or improving its condition. Accordingly, you are not entitled to an immediate deduction under section 25-10 for these repairs. As the expenses are not deductible immediately or over several years, they may be included in the cost base of the property. These expenses can be included in the fourth element being a capital cost to preserve the value of your asset as per subsection 110-25(5). It may be considered when calculating the capital gain or loss on the property when you dispose of it in the future. | Detailed Reasoning - Question 2: Can you deduct expenditure you incurred for the items that relate to capital works completed at your rental property under Division 43 of the ITAA 1997? | Summary: Yes. Items 10, 11, 12, and 14 are capital works expenses because they are improvements to the property or structural improvements. You are entitled to a capital works deduction under Division 43 for 2.5% of the cost of the installation in your rental property over 40 years, while the property is rented or available for rent. | Detailed Reasoning - Capital works: In some situations, depending on what the expenditure was for, initial repair expenses may be classified as capital works. Capital works is used to describe certain kinds of construction expenditure on buildings, structural improvements, extensions and alterations. Division 43 provides a deduction for capital works. Under Division 43, a deduction for capital works is dependent, among other things, on whether there is 'construction expenditure' for the capital works, which is defined in subsection 43-70(1) as 'capital expenditure incurred in respect of the construction of capital works'. Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements addresses a number of matters that are relevant in determining entitlement to, and the amount of, a deduction under Division 43 in respect of expenditure on the construction of assessable income producing buildings and other capital works. It also identifies certain expenses that are included in construction expenditure. Paragraph 7 of TR 97/25 outlines the three categories of capital works in respect of section 43-20 as: • Buildings or extensions, alterations or improvements to buildings • Structural improvements or extensions, alterations or improvements to structural improvements; and • Environment protection earthworks. Examples of structural improvements are set out in subsection 43-20(3) which include, amongst other things, sealed roads, sealed driveways, pipelines, retaining walls and fences. Subsection 43-70(2) lists a number of expenditures that are excluded from the definition of construction expenditure. 2) Construction expenditure does not include: (a) expenditure on acquiring land; or (b) expenditure on demolishing existing structures; or (c) expenditure on clearing, levelling, filling, draining or otherwise preparing the construction site prior to carrying out excavation works; or (d) expenditure on landscaping; or (e) expenditure on plant; or (f) expenditure on property for which a deduction is allowable, or would be allowable if the property were for use for the purpose of producing assessable income Examples of structural improvements are set out in subsection 43-20(3) which include, amongst other things, sealed roads, sealed driveways, pipelines, retaining walls and fences. Subsection 43-25(1) provides that the rate of deduction for capital works which began after 26 February 1992 for a rental property is 2.5% over a period of 40 years. A capital works deduction can only be made after the completion of the capital works. | Detailed Reasoning - In your circumstances: Items 10, 11, 12, and 14 are capital works expenses because they are improvements to the property or structural improvements. You are entitled to a capital works deduction under Division 43 for 2.5% of the cost of the installation in your rental property over 40 years, while the property is rented or available for rent. | Detailed Reasoning - Question 3: Are you able to immediately deduct under Division 43 of the ITAA 1997 your share of the undeducted amounts of capital expenditure related to the items that were destroyed? | Summary: Yes. Items 2, 5 and 6 were destroyed after you acquired the property and you can claim a balancing adjustment for the remaining balance of the construction cost under section 43-250. You need to work out how much of the 'undeducted construction expenditure' for the extension relates to the part of the extension that has been destroyed. | Detailed Reasoning - Detailed reasoning: Paragraph 18 of TR 97/25 states that the Commissioner considers that section 43-40 applies both to voluntary and involuntary destruction of capital works. Subsection 43-40(1) advises you can deduct an amount if all or a part of your area is destroyed in an income year and: (a) you have been allowed, or can claim, a deduction under this Division or former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 , for your area; and (b) there is an amount of un-deducted construction expenditure for your area; and (c) you were using your area in the way that applied to it under Table 43-140 (current year use) immediately before destruction or if not, neither you nor any other entity used your area for any purpose since it was last used by you in that way. Prior to your acquisition of the property, deductions would have been allowed under Division 43 for the previous owner, if the property was used for income earning purposes. Upon purchase of the property, you would have been allowed to continue to claim these capital works and currently there are amounts that have not yet been deducted for construction expenditure. As the requirements of paragraph 43-40(1)(a) and (b) have been satisfied the issue to be considered is whether paragraph 43-40(1)(c) has been satisfied. Paragraph 43-40(1)(c) has two limbs. The first limb is satisfied if 'your area' was used immediately before the destruction in a way that applied to it under the table in section 43-140. The required use for a house constructed in time period three of the table is that the area is used for the purpose of producing assessable income. If it has not been used for this purpose, then the second limb allows a deduction if no entity has used the area for any purpose since it was last used by the taxpayer for the purpose of producing assessable income. In determining if the requirement of paragraph 43-40(1)(c) are satisfied the meaning of 'immediately before the destruction' must be considered. It has been interpreted by the courts, and the Commissioner applied this view in ATO Interpretive Decision ATO ID 2010/35 Income Tax Capital works: destruction and balancing deduction - using 'your area' immediately before destruction of capital works . The Commissioner's view is that 'immediately before' refers to a relatively short period of time between the last use of the area and its destruction. Expenditure on demolishing existing structures is not an amount that can contribute to a deduction for capital works under section 43-10 as it is not construction expenditure (paragraph 43-70(2)(b)). However, such an expenditure may be considered in calculating a deduction under section 43-40. The amount a taxpayer is entitled to deduct under section 43-40 is determined using the method statement contained in section 43-250. Under this method statement you are required to reduce your deduction where you have received or have a right to receive amounts for the destruction of the capital works. Section 43-255 provides that the amounts you have received or have a right to receive for the destruction of the capital works include: • an amount received under an insurance policy or otherwise for the destruction of the capital works, and • an amount received for disposing of any property salvaged from the demolition, less any demolition expenditure incurred on the property. Thus, in calculating the balancing deduction under section 43-250, demolition expenditure acts to offset the lessening of a deduction that occurs because an amount has been received for disposing of the destroyed capital works. | Detailed Reasoning - Application to your circumstances: In your circumstances, the tenant vacated the property on DD MM YYYY and items 2, 5 and 6 were destroyed between DD MM YYYY to DD MM YYYY. The property was not used for the purpose of producing assessable income for the intervening period, which the Commissioner would regard as a reasonably short period of time. For the period between the tenant moving out and demolition commencing on the property, neither you nor any other party used the property for any purpose. Therefore, a deduction under subsection 43-40(1) is allowed for the construction expenditure that has not yet been deducted. If it isn't possible to determine the actual construction costs, you can get an estimate from a quantity surveyor or other independent qualified person. You can claim a deduction for the full costs charged for the estimate in the year it is incurred. Further information can be found by searching ato.gov.au for 'QC 45988 - Capital works deductions .