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Is the taxpayer entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of initial repairs to a rental property that was already tenanted before the repairs were carried out?

No. The taxpayer is not entitled to a deduction under section 25-10 of the ITAA 1997 for the cost of initial repairs to the rental property because the expenditure is capital in nature.

The taxpayer purchased a residential property that was in a state of disrepair.

Soon after purchasing the property, despite the state of disrepair, the taxpayer was able to rent it out to a tenant and derive assessable rental income.

After renting it out, the taxpayer incurred costs in carrying out repairs to the rental property to remedy the defects which existed at the time of purchase.

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises held or used for the purpose of producing assessable income. No deduction is allowable for capital expenditure under this section.

Initial repairs relate to the remedying of defects, damage or deterioration to a property that existed at the time of acquisition and did not arise from the operations of the taxpayer who incurs the repair expenditure (paragraph 4 Taxation Ruling TR 97/23).

Taxation Ruling TR 97/23 at paragraph 59, confirms that expenditure incurred on initial repairs is capital expenditure and is, therefore, not deductible under section 25-10 of the ITAA 1997. This paragraph also states that the cost of effecting initial repairs is still not allowable even if some income has been earned before the repair expenditure is incurred. In other words, the character of initial repairs is not altered because income is derived from the property before the expenses are incurred on the initial repairs.

As the property was in a state of disrepair at the time of acquisition and none of the defects arose in the course of the taxpayer renting out the property, the repairs carried out by the taxpayer are initial repairs and capital in nature.

Accordingly, the taxpayer is not entitled to a deduction, under section 25-10 of the ITAA 1997, for the cost of the initial repairs to the rental property that was being used to produce assessable income before the repairs were carried out.