Private ruling: Deductions and rental deductions
Date of advice: 8 October 2025
Published: 1 December 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the cost of replacing the indoor and outdoor air conditioning units, while reusing the existing ducts, be claimed as a deductible repair under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Can the cost of replacing the indoor and outdoor air conditioning units, while reusing the existing ducts, be claimed as capital works under Division 43 of the ITAA 1997? | A2: No. | Q3: Can the cost of the replacing the indoor and outdoor air conditioning units, while reusing the existing ducts, be claimed as depreciating assets under section 40-25 of the ITAA? | A3: Yes.

Relevant facts and circumstances: You own a rental property. The original air conditioning system at the property was installed in 20XX. The original air conditioning system consisted of a ducted system with indoor and outdoor units providing both heating and cooling functions. The rental property has been leased to tenants since 20XX. On XX/XX/20XX, an inspection of the air conditioning system was carried out by Company A, and it was determined that the air conditioning system was at the end of its life. On XX/XX/20XX, both the indoor and outdoor air conditioning units were replaced at a cost of $XXXX. The new air conditioning system also provides both heating and cooling functions.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 subsection 40-30(1) | Income Tax Assessment Act 1997 Division 43 | Income tax Assessment Act 1997 section 43-20

Reasons for decision: Summary: 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 air conditioning units 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 - Question 2: Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to building and structural improvements where a residential property is used for income producing purposes pursuant to section 43-20 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances:: The air conditioning units are not buildings and structural improvements, nor are they extensions, alterations or improvement to buildings and improvements. Therefore, you are not entitled to a deduction for these expenses under Division 43 of the ITAA 1997. | Detailed Reasoning - Question 3: Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose. The term 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Taxation Ruling TR 2022/1 Income tax: effective life of depreciating assets considers the effective life of depreciating assets. TR 2022/1 lists air conditioning units as depreciating assets. Depreciating assets are those items that can be described as plant, which do not form part of the premises. These items are usually: • separately identifiable; • not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose. | Detailed Reasoning - Application to your circumstances: You have installed indoor and outdoor air conditioning units at your rental property. These items meet the definition of depreciating assets. Therefore, you can claim a deduction from the time they are installed and ready to use for the purpose of producing assessable income under section 40-25 of the ITAA 1997.