Private ruling: Rental deductions
Date of advice: 5 May 2026
Published: 13 July 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim the expenses you incurred for work carried out on the bathroom of your rental property under section 25-10 or Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Can you include the expenses you incurred for work carried out on the bathroom of your rental property in the cost base under section 110-25 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You and your spouse acquired a property (the property). You commenced leasing the property. The bathroom in the property was getting mould on the walls and ceiling. On X/X/202X, you incurred expenses to treat the mould in the property. On XX/XX/202X, you listed the property for sale. On XX/XX/20XX, a potential purchaser requested an engineer report. The engineer report identified the following: • Cracked tile/s noted. A qualified tiler should be engaged for advice and recommendations. • Bench top & cupboard door faces have been painted. Bench top finish is deteriorating. Basin perimeter sealant is deteriorated or missing. • Shower head is leaking. Replacement recommended. Moisture content reading is extremely high on tiled walls inside and outside the shower enclosure. Further investigation by a waterproofing contractor is required for rectification. Rectification will likely incur significant cost. • Suspect waterproofing membrane failure due to moist areas to adjacent external walls. You leased the property out for 5 months during the financial year. After the 5 months the property being leased out, the property remained vacant until being sold. You completed work on the bathroom during the period that the property was vacant. You removed the property from the real estate market to complete the bathroom works. You relisted the property for sale just prior to the work being completed. On XX/XX20XX you incurred expenses for the following: • Strip both shower walls back to frame • Demolish existing tiles and plaster on two shower walls and behind toilet. • Supply plumber to disconnect and re connect taps, toilet, vanity taps and waste • Replaster two walls to tile height • Waterproof two walls to existing shower base and behind toilet. • Replace any rotten timber in those walls • Re tile and caulk • Replace shower rose with standard rose • Install new shower screen • Supply waterproofing certificate and plumbing certificate. You sold the property with settlement occurring on XX/XX20XX.

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 43-10 | Income Tax Assessment Act 1997 section 110-25

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction for the cost of repairs to premises used for income producing purposes. The property was vacant prior to the works being completed up until being sold. You were not earning assessable income at the time of incurring the expenses and had no intentions of leasing out the property after the works were completed. You were no longer using the property for income producing purposes, and it was not genuinely available for rent after the tenants moved out. Consequently, a deduction is not allowable for the expenses that you incurred on the bathroom under section 25-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. However, there are also provisions in income tax laws which deal with specific deductions, including repairs and capital works (Section 25-10 and Division 43 of the ITAA 1997). Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature. Work carried out on a rental property goes beyond being a 'repair' if it changes the character of the property or does more than restore its efficiency and function. Generally, if the degree of improvement involves renewal or replacement of more than a subsidiary part, or the degree of improvement is more than minor and incidental, the 'repair' expenses are of a capital nature and not deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Genuinely available for rent: Where a property is not yet actually being rented it will be considered to be 'held' for the purpose of producing assessable income where it is genuinely available for rent as evidenced by the taxpayer undertaking active and bona fide efforts to let the property at a commercial rental. This would include such activities as listing the property with a real estate agent, placing advertisements in newspapers and not restricting availability (for example, by making the property unavailable for rent during holiday periods) to ensure the taxpayer's private use and enjoyment of the property. (Case R118 84 ATC 773; (1984) 27 CTBR (NS) 13318; Case P116 82 ATC 590; (1982) 26 CTBR (NS) 372; and Case V133 88 ATC 847). In Case No. P116, 82 ATC 590: Case No. 49, 26 CTBR (NS) 372, a property was let for 16 days during the year of income, occupied by the owners for 107 and vacant for the balance of the year. Taxation Board of Review No. 1 apportioned the losses and outgoings attributable to the property on a time basis and allowed a deduction for the proportion that the property was let, i.e. 4.4%. As a general rule the approach of the Board in the case cited should be followed in comparable cases, i.e. the time basis should be used to determine the income tax deduction allowable in respect of the relevant losses and outgoings. A period of time during which a property was available for letting should only be taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period. One guideline when considering the purpose of the expenditure claimed as a deduction is to determine whether the property was genuinely available for rent. In Inglis v Federal Commissioner of Taxation (1987) 87 ATC 2037 at (71)-(72), Deputy President Todd said: ...While it is true that the property was vacant and theoretically available at all times, it cannot be said to have been truly available for letting unless some perceptible effort was being made to obtain tenants in respect of those times, or at least some step taken to draw its availability to the attention of the public, the classic method of so doing being the placing of it with an agent. The sufficiency of the steps taken is a question of fact to be decided in each case, but in this case, considering the irregular advertising and the restriction of the opportunity of renting to Canberrans, there has in my view been insufficient done for it to be able to be said that the property was available for letting for periods adequate to support the claims made... Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent - that is: • the property is advertised in ways which give it broad exposure to potential tenants, and • having regard to all the circumstances, tenants are reasonably likely to rent it. The absence of these factors generally indicates the owner does not have a genuine intention to make income from the property and may have other purposes - such as using it or reserving it for private use. In your situation, the bathroom works were completed after your intentions changed from leasing out the property to selling the property. You did not hold the property after the tenants moved out for the purpose of producing assessable income. Although you were leasing out the property at the time you first advertised the property for sale, you did not incur the expense for the purpose of gaining or producing assessable income. You incurred the expense for the purpose of securing the sale of the property. Expenses relating to a rental property are allowable as deductions, but only for the period the property was rented or genuinely available for rent. Based on information provided, your rental property was not genuinely available for rent at the time the expenses were incurred. You are therefore not able to claim a deduction for the expenses that you in incurred to repair the bathroom under section 25-10 of the ITAA 1997. | Summary: Section 110-25 of the ITAA 1997outlines the five elements that make up the cost base or reduced cost base of a CGT asset. The fourth element of the cost base allows you to include capital expenditure to increase or preserve the value of a CGT asset. As a deduction is not allowable for the expenses that you incurred on the bathroom works, you are able to include the expenses in the fourth element of the cost base, capital expenditure, under subsection 110-25(4) of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: Subsection 110-25(5) of the ITAA 1997 details that the fourth element of the cost base of a CGT asset includes capital expenditure incurred to increase or preserve the asset's value. Consequently, as a deduction is not allowable, you do satisfy the requirements of the fourth element of the cost base of a CGT asset as detailed in subsection 110-25(5) of the ITAA 1997. Therefore, you can include the expenses that you incurred on the bathroom for your 99% ownership interest in the property in the cost base under subsection 110-25(5) of the ITAA 1997.