Rental property deductions Question 1 Can you claim a deduction for the repair work completed in your investment property to remedy the water damage that occurred to the ensuite shower wall and base, tiling, grout work, including gyprock sheeting, paintwork and timber framing to the adjoining wall with the bedroom? Summary The expenses listed for repairing the water damage that occurred to the ensuite shower wall and base, tiling, grout work, including gyprock sheeting, paintwork and timber framing to the adjoining wall with the bedroom relate to repairs undertaken to restore the property to its former condition. These expenses restored the efficiency and function to the property without changing is character or improving the appearance of the property. Detailed reasoning Repairs 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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.
Expenditure will be of a capital nature where it is incurred is for reconstruction of an entirety or repairs undertaken to remedy defects, damage or deterioration in existence when the premises were acquired. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and circumstances in which expenditure incurred for repairs is an allowable deduction. We refer to the following: Paragraph 15 explains that a repair for the most part is occasional and partial. A repair merely replaces a part of something that is already there and has become worn out or dilapidated. Work carried out can fairly be described as a 'repair' if done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during the income producing use of the property or to defects that emerge suddenly during that time.
Paragraph 17 advises that in determining whether work done to property constitutes 'repairs', it is more significant to consider whether the work restores the efficiency of function of the property without changing its character than it is to consider whether the appearance, form, state or condition of the property is exactly restored. Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls. However, expenses which are capital, or of a capital nature are not deductible as repairs or maintenance. Application to your circumstances The repair expenses for the water damage that occurred to the ensuite shower wall and base, tiling, grout work, including gyprock sheeting, paintwork and timber framing to the adjoining wall with the bedroom remediated the damage and deterioration to your rental property, that occurred whilst the property was used for income producing purposes. The works undertaken restored the function of the property without changing its character. Furthermore, these expenses were not defined as capital expenditure, and you are entitled to a deduction under section 25-10 of the ITAA 1997. Issue
2 - Non-allowable as Immediate deductions Question 2 Can you claim an immediate repair deduction for the remainder of the work completed in your investment property to replace the following items. Shower head, shower mixer tap, vanity unit, vanity taps, toilet, toilet holder, towel rails, lighting, mirror and exhaust fan? Summary The items listed in question 2, are not deductible as repair expenses under section 25-10 of the ITAA 1997. Detailed reasoning Subsection 25-10(1) of the ITAA 1997 states that you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. We refer to the following paragraphs of TR 97/23: Paragraph 13 provides that the term 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property.
Paragraph 33 states that the cost of replacing things such as free-standing stoves, refrigerators and furniture in premises used for income purposes is capital expenditure and is not deductible under section 25-10 of the ITAA 1997. Items such as those listed in paragraph 33 are items of plant, and if not permanent fixtures, these items can be depreciated over time. Paragraph 37 confirms that repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction is distinguishable from repair and is a restoration of the entirety. The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' (Lindsay v FC of T (1960) 106 CLR 377 at 385. Further to this and stated in the Rental properties guide 2025, page 33 has Example 19: replacement of an entirety (capital works) and simultaneous repairs. This example highlights a toilet is a fixture but also an entirety because: • it is identifiable as a separate item of capital equipment • it provides a useful function independent of the rest of the premises.
Replacing an entirety isn't a repair. The cost of installing the new toilet is claimed as a capital works deduction. Repairs done at the same time as improvements Paragraph 55. 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. In other words, 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. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements. Paragraph 56. If however 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 from the cost of the improvements, we regard the cost of the entire work as being of a capital nature and not deductible.
Paragraph 57. For example, if work normally regarded as a repair, such as painting, is done to property as part of, or in conjunction with, a reconstruction and modernisation of the property, and it cannot be segregated and its cost separately quantified, it may not be deductible. It is again a question of fact and degree. Taxation Ruling TR 2022/1 Income Tax: effective life of depreciating assets lists hot water services, air conditioners, fans including fans and lights as depreciating assets. Application to your circumstances We understand that the works conducted on the property were to remediate damage from the deterioration that has occurred by ordinary wear and tear over time when the property was rented. However, the replacement of the shower head, shower mixer tap, vanity unit, vanity taps, toilet, toilet holder, towel rails, lights and mirror are a renewal and reconstruction of the entirety. Therefore, you are not entitled a deduction for these expenses under section 25-10 of the ITAA 1997. They are considered entirety because they can be identifiable as a separate items of capital equipment, they provide a useful function independent of the rest of the premises.
The cost of installing the following items can be claimed as a capital works deduction under Division 43 of the ITAA 1997: • shower head • shower mixer tap • vanity unit • vanity taps • toilet • toilet holder • towel rails • mirror • lights Decline in value The cost of installing the exhaust fan is considered a depreciating asset and you are entitled to a deduction under section 40-25 of the ITAA 1997. 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. 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. In the Rental properties guide 2025, page 79 lists exhaust fans (including light/heating) as deductions for decline in value. As you have installed an exhaust fan at your rental property, this item meets the definition of a depreciating asset. Therefore, you can claim a deduction from the time the exhaust fan was installed and ready to use for the purpose of producing assessable income under section 40-25 of the ITAA 1997. You should obtain an itemised invoice which separately lists the costs of repairing the water damage that occurred to the ensuite shower wall and base, tiling, grout work, including gyprock sheeting, paintwork and timber framing to the adjoining wall with the bedroom and the replacing of the shower head, shower mixer tap, vanity unit, vanity taps, toilet, toilet holder, towel rails, lighting, mirror, exhaust fan and the installation cost so they can be claimed correctly. If the cost of the labour isn't separately identified, it should be apportioned between the different jobs on a fair and reasonable basis.
On DD MM YYYY, you and your spouse purchased a property located at XXX XXX for $XXX The property was first built in 20YY. You and your spouse are joint tenants with equal ownership. The property is managed by a real estate agent. You have a landlord/tenant relationship. The property is rented at a rate that was within the market band of rent at the time. The rental charge is determined by you as landlords, this is determined an appropriate amount based on recommended rental band window provided by the real estate agent. Your spouse had to relocate interstate for his work. The property has been leased when you are both unable to reside in XXX. From MM YYYY to MM YYYY, you and your spouse lived in the property. From MM YYYY to MM YYYY, due to a relocation to another state, you rented out the property. In MM YYYY, you relocated back to XXX and occupied the property until MM YYYY. In MM YYYY, you and your spouse relocation to another state, again you rented out the property. Your spouse employer has given no indication of a future relocation back to XXX, as such the property will remain leased for the foreseeable future.
The property has been available for rent through the entire income year of the private ruling. Circumstances leading to the repair In MM YYYY, the tenants reported dampness in the master bedroom at the time of the rental inspection. The rental agency sent out their contractor to investigate, who determined the wall adjoining the master bedroom and ensuite had water damage inside. In MM YYYY, you contacted your rental insurance provider who sent out their assessor to investigate the issue. The assessor identified failure in the waterproofing within the ensuite shower cubicle. As water had been leaking in the walls surrounding the shower cubicle for some time, the internal structure of the walls had corroded. You contacted three companies and obtained quotes in MM YYYY. Repairs commenced in MM YYYY and were completed in MM YYYY. You and your spouse have paid for the repairs. You and your spouse did not receive an insurance payment. The ensuite repaired, including: • Damage to the Gyprock sheeting • Damage to the paint • Damage to the wall sheeting • Damage to the timber • Replacing the shower
When work commenced the following items which were not damaged were replaced. • new shower head • new shower mixer tap • vanity unit • vanity taps • new toilet • toilet holder • towel rails • lighting • mirror • exhaust fan
Income Tax Assessment Act 1997 section 25-10 Income Tax Assessment Act 1997 section 40-25 Income Tax Assessment Act 1997 Division 40 Income Tax Assessment Act 1997 Division 43