Initial repair ATO for my rental property?
Initial repairs, ATO, and what’s allowed are often asked when you acquire a new rental property with existing known repairs. The old house might need fixing before it can be rented. Initial repairs may include tasks such as plumbing, painting, new carpet installation, or appliance repairs, to name a few.
Initial Repair must be capitalised!
Though Initial repair ATO cannot be claimed outright in the first tax year, there is some tax relief. These repairs should be treated as a capital expense. Treating them as a capital expense will add them to the property’s cost base.
We are often asked what the tax treatment of an initial property repair is. Can you claim a tax deduction for repairs to a newly acquired rental property investment? Will the ATO allow it!
Why won’t the ATO treat all repair claims as an expense?
What is the Government thinking about initial repairs legislation? Why did they decide you can’t claim the repair outright when you buy the property?
In looking at the intent of the legislation, the lawmakers said if you haven’t yet rented the property out there is no right to claim an expense on revenue account. Furthermore, the ability for some taxpayers to buy a rundown property and then claim all the expenses in fixing that property up would mean the ATO would be inundated with excessive claims. Hence, the initial repairs must be capitalised.
A repair claim should be evaluated on its merits. You may find it may not be classified as an” initial repair” simply because it’s the first repair made after you acquired a rental property. The ATO has designed a tool kit, which can be accessed here. Also, you can refer to taxation ruling TR 93/23 where you can read more. The ruling outlines a repair is not an ‘initial repair’ simply because it is the first repair made after the property is acquired. The ATO has numerous examples within these two resources.
Examples of an initial repair ATO and what will be questioned
Here are some initial repair examples:
Fixing a Damaged Roof: If the rental property’s roof was damaged or leaking at the time of purchase, it is an initial repair.
Replacing Broken Windows: If any windows were broken or dysfunctional when the property was bought, their replacement is categorised as an initial repair.
Repairing Electrical Systems: If the electrical systems, like wiring or electrical appliances, were not functioning correctly at the time of purchase. Therefore, any repairs to make them operational would be considered an initial repair ATO.
Plumbing Repairs: Fixing any pre-existing issues with the plumbing system, such as leaking pipes or faulty plumbing fixtures, is classified as an initial repair.
Restoring Damaged Flooring: This includes repairing or replacing floorboards, tiles, or carpets that were in poor condition when the property was acquired.
All is not lost, but repairs that are regarded as initial cannot be claimed outright and must be capitalised. The capitalised repairs are added to the cost base of the Asset. This will assist when calculating the capital gain upon sale as a cost. This means you can reduce your capital gain at the sale of the property, but you cannot claim it against your taxes when you acquire the property in the first year.
Here is an example of an ongoing repair that is tax-deductible!
If the dishwasher worked perfectly when you started renting the property. It now needs to be repaired a couple of months thereafter. This would be considered an ongoing repair and is tax-deductible.
We often get asked if I live in my house and then consider renting it out. Are the expenses incurred available to be claimed? Sadly, the ATO see these as initial repairs as no rent has yet been received. Therefore, these items would be classified as initial repairs and added to the cost base of the property.
Deductible if Incurred When Property is Available for Rent
If the compliance certificate is:
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obtained when the property is already available for rent, or
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part of making the property genuinely available for rent (e.g. listed on the market, not occupied privately),
Then it’s treated as a deductible repair or maintenance expense under section 8-1 of the ITAA 1997.
ATO view: Expenses incurred to make the property rentable and to meet rental regulations (like gas or electrical safety checks) are generally deductible in the year they are incurred once the property is genuinely available for rent.
❌ Not Deductible if Incurred While Still Private Use
If the heater compliance work is done while you’re still living in the property, or before it’s genuinely available for rent, then the cost may be considered:
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Capital in nature (improving or modifying the property to a new use), or
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A private expense, and therefore not immediately deductible.
You may instead be able to include it in the cost base of the property for CGT purposes if the property is later sold.
Repair vs Improvement: Need help?
Remember, keep all receipts and photos of repairs and improvements for your property.
Gartly Advisory looks after many happy clients who own rental properties. The advice we have given is of a general nature, so please check with a professional tax adviser. Plan carefully and do your homework when it comes to acquiring a new rental property. The ATO is closely examining rental property claims as more Australians seek to acquire properties for investment purposes.
Unsure what can be claimed upon purchasing your new rental property? Reach out to us, and we can assist!
