Quarterly Newsletter: December 2025

Correctly dealing with rental property repairs

Taxpayers who have had work done on their rental property should ensure the expense is categorised correctly to avoid errors when completing their tax return.

A deduction for 'repairs and maintenance' expenses can be claimed for work done to remedy, or prevent defects, damage or deterioration from using the property to earn income. These expenses can be claimed in the year they were incurred.

However, some 'capital' expenditure may not be immediately deductible, such as for 'initial repairs', 'capital works', 'improvements' and depreciating assets.

Initial repairs include fixing any pre-existing damage or deterioration that existed at the time of purchasing the property, even if the damage or deterioration was unknown to the taxpayer at the time of purchase. Initial repairs are treated as part of the acquisition cost and included in the cost base of the property for CGT purposes, unless they are capital works or depreciating assets.

Capital works are structural improvements, alterations and extensions to the property, and can generally be claimed at 2.5% over 40 years.

Capital works deductions can only be claimed after the work has been completed, regardless of when the taxpayer pays the deposit and instalments.

Improvements or renovations that are structural are also capital works. Work that goes beyond remedying defects, damage or deterioration that improves the function of the property is regarded as an improvement. Repairs to an 'entirety' are capital and cannot be claimed as repairs.

Repairs to an 'entirety' generally involve the replacement or reconstruction of something separately identifiable as a capital item.

Depreciating assets are treated as follows:

• Deductions for 'new' assets must generally be claimed over time according to their effective life.

• Second-hand depreciating assets generally cannot be deducted.

ATO's focus on small businesses

The ATO is 'detecting and addressing' recurring errors in specific industries when businesses have a turnover between $1 million and $10 million.

These industries include property and construction (including builders, contractors and tradies), and professional, scientific and technical services (including engineering, design, IT and consulting professionals).

In these industries, the ATO continues to see recurring issues, including:

• omitted sales and income in BAS and tax returns, including income from related entities;

• overclaimed expenses and GST credits;

• private expenses incorrectly reported as business-related, or not properly apportioned between business and personal use;

• failure to register for GST when required;

• incorrect claims for the research and development (R&D) tax incentive offset, especially for activities that do not meet the eligibility criteria; and

• not seeking independent advice from a registered tax agent, particularly in head contractor/subcontractor arrangements.

  
  

By sharing the issues that it is seeing, the ATO hopes to help taxpayers running a small business in one of these (or other) industries to avoid common errors and get it right from the start.

ATO's new approach to holiday home expenses

The ATO has announced that it will take a somewhat different approach in relation to expenses that are claimed in relation to holiday homes.

Broadly, the ATO now takes the view that, if a taxpayer's rental property is also their holiday home, certain deductions relating to holding it will be completely denied (rather than being apportioned).

Expenses relating to ownership and use of the holiday home (e.g., interest, rates and maintenance) will not be deductible, unless the holiday home is 'mainly' used to produce assessable income.

Whether a holiday home is used 'mainly' to produce assessable income will be determined based on a consideration of a number of factors.

However, this will generally not apply to expenses incurred in relation to holiday homes that are rental properties before 1 July 2026, if those expenses are incurred under an arrangement entered into prior to 12 November 2025.

Please contact our office if you want more information regarding this new development.

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Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.