Personal Income Tax

The ATO Regarding Initial Repairs for Rental Property Owners

It is very important to remember that these repairs are usually made on a capital account.  Because of this, these initial repairs are not tax-deductible according to ATO guidelines which allow deductions on certain types of repairs and maintenance costs.  However, the property owner can claim a deduction for property depreciation, as outlined in the standard uniform capital allowances and capital works allowances. To illustrate this, let’s imagine John bought a new rental property and decided to improve it after purchase. He strips the property and replaces old fixtures like lights, taps, cupboards etc, with new and better ones. This complete refurbishment costs him $12,000. If John were to claim repairs and maintenance for this newly acquired rental property, the claim would be disallowed because initial repairs and improvements to a property are not deductible.

Repair or Improvements?

When taxpayers claim repairs and maintenance costs on their tax return, the ATO may ask for evidence that the repairs in question are not considered initial repairs. To help taxpayer determine whether or not an expense is considered an improvement, the ATO has issued some guidelines. Rental property owners do not get any undue attention from the ATO on initial repairs if these guidelines are followed:

  • Was the item replaced or repaired considered a vital and needed portion of the structure of the property?
  • Was the work supplied more than sufficient for the need of restoring the functionality of the property? Reminder: A “repair” refers to the renewal of something to a previous state without changing its initial character.
  • Was the item in question replaced with a new or better one?
  • Does the new repair/replacement have substantial benefits over the previous one? (Including the benefit that the likelihood of repair costs in the future will be considerably less.)

If the answer is “yes” to some or all of the aforementioned questions, then the expenditure is probably considered an improvement and is consequently non-deductible. 

Reporting repairs and improvements properly for rental properties can be a bit difficult, but it is vital to do some research in order to ensure that tax deductions are correct. To help taxpayers, the ATO provides an example that helps in determining whether or not the item in question is considered an improvement or repair:

“Mary Fabrica owns a factory in which the bitumen floor laid on a gravel base needs repairing. She replaces it with a new floor consisting of an underlay of concrete topped with granolith (a paving stone of crushed granite and cement).

The new floor, from a functional efficiency (rather than an appearance) point of view, is not superior in quality to the old floor. The new floor performs precisely the same function as the old and is no more satisfactory. In fact, the new floor is more expensive to repair than the old. Because the new floor is not a substantial improvement, it is a repair and its cost is most likely deductible.

This scenario is applicable to most rental property owners as well, so where the changes you make on your rental property are repairs rather than improvements, the costs will be tax deductible.


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