Taxpayers who have undertaken work on their rental property should ensure that all expenses are correctly categorized to avoid errors in their tax return.
Expenses for repairs and maintenance can be claimed for work carried out to fix or prevent defects, damage, or deterioration arising from the property’s use to generate income. These costs are deductible in the year they are incurred.
Initial repairs relate to fixing damage or deterioration that existed when the property was purchased, even if the taxpayer was unaware of the issue at the time. These costs are considered part of the acquisition cost and are included in the cost base of the property for capital gains tax (CGT) purposes—unless they qualify as capital works or depreciating assets.
Capital works include structural improvements, alterations, and extensions. These can generally be claimed as a deduction of 2.5% per year over 40 years, subject to certain exceptions. Deductions can only be claimed after the work has been completed, regardless of when deposits or progress payments are made.
Improvements or renovations that enhance the property’s function are also classified as capital works, as they go beyond remedying wear and tear. Similarly, repairs made to an “entirety” (a separately identifiable capital item) are considered capital in nature and cannot be claimed as repairs.
Depreciating assets should be treated as follows:
New assets: Deductions must generally be claimed over time, based on their effective life.
Second-hand assets: Deductions are generally not allowed.
For further details, tax agents and property owners can refer to the ATO’s fact sheet “Rental Repairs, Maintenance and Capital Expenses” (QC 104435) available on the ATO website.
Please contact us directly if you need any help with this.
(Source: Information extract from The NTAA's October 2025 Tax Advisers' Voice)