Private ruling: Rental deduction
Date of advice: 15 December 2025
Published: 2 February 2026
Ruling period: Year ended DD MM 20YY | Year ended DD MM 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Is the insurance payout of $XX for lost rental income you received assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 ( ITAA 1997)? | A1: Yes. The compensation for loss of rental income is assessable as ordinary income under section 6-5 of the ITAA 1997. | Q2: Is the insurance payout you received to pay for the work completed in the 20XX year on your damaged rental property roof an assessable recoupment under section 20-20 of the ITAA 1997? | A2: Yes. The insurance payout you received is an assessable recoupment under section 20-20 of the ITAA 1997 and forms part of your assessable income. | Q3: Does an insurance payout for plasterboard repair costs need to be deducted against capital works incurred under section 43-250 of the ITAA 1997? | A3: Yes. A balancing deduction can be claimed for the remaining un-deducted construction costs, minus the insurance payout amount. | Q4: Can the damaged plasterboard repair costs be claimed as an immediate maintenance deduction for the financial year 2025 under either section 8-1 or section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) ? | A4: No. | Q5: Does the damaged plasterboard repair costs represent a capital works deduction under Division 43 of the Income Tax Assessment Act 1997( ITAA 1997) ? | A5: Yes. The remediation works are related to initial repairs and are capital in nature. This amount can be deducted as a capital works deduction under division 43 of the ITAA 1997 net of any relevant insurance payments received for the work undertaken. | Q6: Can the bathroom repair labour costs be claimed as an immediate maintenance deduction for the financial year 2025 under either section 8-1 or section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) ? | A6: No. | Q7: Does the labour costs form part of the overall bathroom repair costs (together with the bathroom repair material costs) represent a capital works deduction under Division 43 of the Income Tax Assessment Act 1997( ITAA 1997) ? | A7: Yes. The bathroom repair labour cost should be claimed as capital works deduction based on the pre-purchase residential building report there is evidence of pre-existing water damage and distortion prior to your purchase of the property, therefore the repair cost will be treated as capital deduction, deductible at 2.5% per year over 40 years.

Relevant facts and circumstances: You own a stand-alone house that is available for short-term holiday rentals. The pre-purchase residential building pre-inspection report was conducted by a building services company on DD MM 20YY. An extract of the building inspection report is as follows: In MM 20YY a water leak occurred in the pipework that services three adjacent bathrooms in the rental property. A plumbing business was engaged to investigate and identify the source of the leak DD MM 20YY. The cost of the inspection was $X,XXX. The plumbing cost has been claimed as maintenance deduction in 20YY income year. The inspection has revealed and recommended the following: • The water leak resulted in damage to a part of the plasterboard and skirting located in the hallway adjacent to the bathrooms. • The plumber advised that the water leak was the result of the deterioration and failure of the pipework which was located within the wall cavity behind each bathroom. • To access and repair the failed pipework (located in the wall cavity), it would be necessary to demolish each bathroom. Quotes were then obtained to establish the cost of the repairs and renovations required. A Building services company was then engaged to undertake the demolition and repair of the bathrooms. The works conducted in MM 20YY in the unit included the following. • Removal of all bathroom fittings and tiles to by X bathrooms. • Remove existing and install new floor subgrades. • Supply and install new waterproofing. • Remove and replace found damaged plumbing throughout ceiling to bathrooms. • Install new plumbing in the bathrooms. • Supply and install new tiles throughout. • Fit all new vanities and shower screens. • Fit all new fitments. • Remove and replace water damaged ceilings in bathrooms. • Remove / replace water damaged plasterboard found on the outside of the bathroom ceilings and walls. • Replace timber skirting / existing rotten from water damage. • Paint all replaced plasterboard throughout. During the works undertaken it was found that the underlining issue in all three adjacent bathrooms was the failure of plumbing lines found in the ceiling cavity. Water had traversed between wall panelling and tiles, resulting in the adjacent plasterboard walls becoming saturated with water. A water meter was placed on the plasterboard walls recording XXX% moisture levels. The water damage present required a full replacement of the wall finishes both internally within the bathrooms, and to the external plasterboard walls on the adjacent side of the bathrooms. As the wall structures were made of concrete blockwork, no structural damage had occurred. However, it was necessary to remove and replace water damaged ceilings, plasterboard found on the outside of the bathroom walls, as well as timber skirting. Repainting was required on all plasterboard and skirting. As part of the works undertaken all plumbing has been replaced from the three bathrooms back to the entry point of the building preventing any future concerns. The above plumbing cost were completed and incurred in the financial year ending DD MM 20YY. During the period that the property was being repaired, it was necessary to cancel the pre-existing guest bookings for that period. This cancellation resulted in loss of rental income. You made a claim against XXX arising from the water leak. The insurance accepted the claim and provided the following payments to you: • Insurance payout for the plumbing costs of $X,XXX previously incurred and claimed as repairs in your 20YY income return. • Insurance payout for the damaged plasterboard repair costs totalling- $X,XXX. • Loss of rental income during the 20YY income year: $XX,000. • The cash settlement total was $XX,XXX less the excess amount of $XXX. The insurance payout was received in the financial year ending DD MM 20YY.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5 | Income Tax Assessment Act 1997 subsection 8-1 | Income Tax Assessment Act 1997 subsection 10-5 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 43-25 | Income Tax Assessment Act 1997 section 43-40 | Income Tax Assessment Act 1997 subsection 43-70(2) | Income Tax Assessment Act 1997 section 43-250 | Income Tax Assessment Act 1997 section 43-255 | Income Tax Assessment Act 1997 section 110-25

Reasons for decision: Summary: The compensation for loss of rental income is assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997(ITAA 1997). | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. For income tax purpose, an amount paid to compensate for loss generally acquires the character for that which it is substituted. A payment or benefit received by a taxpayer is included in your assessable income if it is: • Income in the ordinary sense of the word, being ordinary income, or • An amount or benefit that through the operation of the provisions of the tax law is included in assessable income, being statutory income. The determination of the character of a payment and whether it is liable to tax, depends on the nature of the payment. A compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax. The lump sum amount you received of $XX,000 for the loss of rental income is income according to ordinary concepts because it replaces rental income you would otherwise have received. It is therefore assessable income under to section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 2: Insurance payout for plumbing costs | 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. | Detailed Reasoning - Question 3: Damaged plasterboard | Summary: The insurance payments that you received that relates to capital allowances or capital works deductions for your rental property, is not an assessable recoupment and are not assessable under any other provision of the ITAA 1997. Therefore, these insurance payments do not form part of your assessable income. | Detailed Reasoning - Detailed reasoning: Under paragraph 20-20(2)(b) of the ITAA 1997, a recoupment of a loss or outgoing is only an assessable recoupment if you can deduct an amount for the loss or outgoing for the current year, or has deducted or is able to deduct an amount for it for an earlier income year, under any provision of the ITAA 1997. The phrase "for the loss or outgoing" in paragraph 20-20(2)(b) of the ITAA 1997 requires a connection between the deduction and the loss or outgoing for which the taxpayer had been recouped. In your case, the relevant loss or outgoing includes an amount for the destruction of the capital items. Whilst you may be able to deduct an amount in relation to the original construction of the capital works under section 43-40 of the ITAA 1997, or in relation to a future construction of replacement of capital works under section 43-10 of the ITAA 1997, these are not deductions for the loss referred to in paragraph 20-20(2)(b) of the ITAA 1997. No outright deduction is available for the loss of the capital allowances or capital works. | Detailed Reasoning - Application to your circumstances: The insurance payouts that relate to the capital allowances and capital works deductions for your rental property is not an assessable recoupment under section 20-20 of the ITAA 1997. Additionally, the insurance payouts are also not assessable under any other provisions of the ITAA 1997. These costs would constitute as an initial repair and can be included in your cost base as per section 110-25 of the ITAA 1997, to the extent that these expenses are not covered by any insurance proceeds received. A balancing deduction can be claimed for the remaining un-deducted construction costs, minus the insurance payout amount. | Summary: In your case, the bathroom and plumbing renovations are a renewal and a reconstruction of the entirety of those items. Therefore, you are not entitled a deduction for these expenses under section 25-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs outlines the circumstances in which expenditure for repairs is deductible. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. 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. Paragraph 123 of TR 97/23 provides that a repair restores the efficiency of function of the property (without changing its character) not whether the same material as the original is used. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In your case, the bathroom and plumbing renovations are a renewal and a reconstruction of the entirety of those items. Therefore, you are not entitled a deduction for these expenses under section 25-10 of the ITAA 1997. | Summary: The remediation works are related to initial repairs and are capital in nature. This amount can be deducted as a capital works deduction under division 43 of the ITAA 1997 net of any relevant insurance payments received for the work undertaken. The initial repair expense incurred will form part of the asset's cost base for capital gains tax on the sale of the property. You can find further information on our ATO website and search QC 66023. | Detailed Reasoning - Initial repairs: An 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 existing when the property was acquired, and not arising from the operations of the taxpayer who incurs the repair expenditure (see paragraphs 59 to 61 of TR 97/23). 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 of the ITAA 1997. Subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. The following are examples of expenses which are capital or of a capital nature: • replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator) • improvements, renovations, extensions and alterations, and • initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property 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. 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. TR 93/23 Paragraph 61 specifically considers the fact of whether a taxpayer was not aware of the need for repairs at the time of purchase. 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. 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. | Detailed Reasoning - Capital works deductions: Division 43 of the ITAA 1997 allows a deduction for capital works in relation to a structural improvement to a residential rental property where the structural improvement was constructed after XX February 19XX. The deduction can be claimed for 40 years from the date construction was completed. The rate of deduction per income year is 2.5%. Capital works also generally include improvements to buildings (subsection 43-20(1) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: The documentation provided indicates that the repair works are being undertaken to rectify defects that existed prior to the time you acquired the unit. In addition, the extent of the bathroom and plumbing renovations are extensive and constitute an overall renewal and a reconstruction of the entirety of those items. There was removal of all bathroom fittings and tiles in all three bathrooms. Removal of existing and installation of new floor subgrades- capital improvement (structural upgrade) Installation of new waterproofing- capital improvement Removal and replacement found in damaged plumbing throughout the ceiling to bathroom- capital improvement (whole system renewal) Installation of new tiles throughout the bathroom- capital improvement Fitting new vanities and shower screens- capital improvement Fitting all new fitments- capital improvement Remove and replace water damaged ceilings in bathrooms- capital improvement (entire ceiling replaced) Removal and replacement of water damaged plasterboard found on the outside of the bathroom's ceilings and walls- capital improvement Replacement of timber skirting/ existing rotten water damage- capital improvement Painting of replaced plasterboard- capital improvement The remediation works are related to initial repairs and are capital in nature. This amount can be deducted as a capital works deduction under division 43 of the ITAA 1997 net of any relevant insurance payments received for the work undertaken. The initial repair expense incurred will form part of the asset's cost base for capital gains tax on the sale of the property. You can find further information on our ATO website and search QC 66023. | Summary: The labour is directly associated with undertaking the capital works and the overall renewal of the bathrooms going beyond mere repairs indicating an overall capital improvement . The bathroom renovation labour cost should therefore be included as part of capital works deduction based, on specifically for constructing or creating capital assets. The costs will be treated as capital deduction and should be deductible at 2.5% per year over 40 years. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 provides for general deductions from your assessable income. However, paragraph 8-1(2)(a) prohibits you from deducting an amount of expenditure under section 8-1 to the extent that your expenditure is capital or of a capital nature. Paragraph 9 and 10 of Tax Ruling TR 2023/2- Income tax: application of paragraph 8-1(2)(a) of the Income Tax Assessment Act 1997 to labour costs related to the construction or creation of capital assets states the following: 9. 'To the extent capital asset labour costs are incurred specifically for constructing or creating capital assets, their essential character is considered to be capital or of a capital nature and therefore cannot be deducted in accordance with paragraph 8-1(2)(a). This is not limited to those involved in the construction work itself, but can include the costs of labour for those who perform functions in relation to the construction or creation of capital assets.' 10. 'It is a question of fact and degree whether costs are incurred specifically for constructing or creating a capital asset.' | Detailed Reasoning - Application to your circumstances: The labour is directly associated with undertaking the capital works and the overall renewal of the bathrooms going beyond mere repairs indicating an overall capital improvement . The bathroom renovation labour cost should therefore be included as part of capital works deduction based, on specifically for constructing or creating capital assets. The costs will be treated as capital deduction and should be deductible at 2.5% per year over 40 years. | Detailed Reasoning - Further Information: Your capital improvements were carried out after XX February 19XX as per section 43-25(1) ITAA 1997 your works default to the 2.5% annual depreciation rate over 40 years.

Question 1: Insurance payout for the rental Income