TR 97/23: Understanding repairs, maintenance & capital improvements

TR 97/23 clarifies how the ATO interprets the deductibility of costs associated with repairs, maintenance, initial repairs and capital improvements, under the Income Tax Assessment Act 1997 (ITAA 97).

The key distinction is whether the expenditure restores the property to its previous condition or improves it beyond that state. The answer determines whether it’s an immediate deduction or a capital expense claimed over several years.

A registered quantity surveyor can help property investors apply this ruling correctly to ensure full compliance and optimal tax outcomes.

Under Section 25-10 of ITAA 97, a repair involves:

“The remedying or making good of defects in, damage to or deterioration of property to be repaired (being defects, damage or deterioration in a mechanical and physical sense).”

Repairs restore an asset to its original condition without changing its character – for example, patching a crack in plaster or fixing a leaky pipe.

Work is generally considered a repair if it restores function or efficiency without altering the property’s essential nature. However, replacing or reconstructing the entirety of an asset is considered an improvement, not a repair.

As TR 97/23 states:

“Renewal, replacement or reconstruction of the entirety (i.e. the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair.”

Maintenance is work carried out to prevent deterioration or damage before it occurs. Typical examples include:

Maintenance and repairs often overlap. For instance, repainting a wall to fix flaking paint is a repair, while repainting to prevent deterioration is maintenance.

Under TR 97/23, both repair and maintenance work is 100 per cent deductible if they maintain the property’s condition without enhancing its value beyond the original state.

Initial repairs address defects or damage that existed at the time of purchase, whether or not the buyer was aware of them.

Examples include:

Because these expenses remedy defects existing at acquisition, they are capital in nature and not deductible under Section 25-10 of ITAA 97.

Capital improvements go beyond simply restoring a property. They enhance its value, extend its useful life or change its character. Work that increases the property’s income-producing potential or significantly boosts its saleability and market value is generally considered a capital improvement.

Under TR 97/23, improvements increase efficiency or functionality and are not immediately deductible.

These costs must instead be claimed through capital works deductions (Division 43) or plant and equipment depreciation (Division 40).

Capital works (Division 43)

Applies to structural or permanently fixed items, such as:

Deductions are typically 2.5 per cent per year for 40 years from the date of construction. Certain commercial properties may be eligible for a 4 per cent rate.

Plant and equipment (Division 40)

Covers removable or mechanical items, such as:

Depreciation depends on the asset’s effective life (set by the ATO) and can be claimed using either the diminishing value or prime cost method.

Items that cost $300 or less may be fully deductible in the year of purchase.

Assets with an opening value less than $1,000 in the year of purchase are classified as “low-cost assets” and may be pooled. Low value pooling allows these assets to be grouped together and depreciated at a fixed rate, accelerating deductions. Assets in the pool continue to be depreciated each year until fully written off.

Tips for classifying expenses according to TR 97/23

• Restore vs. enhance
  Ask whether the work restores the property’s existing condition or improves it. Restoration qualifies as a repair; enhancement is an improvement.
• Magnitude of the work
  Small fixes (e.g. replacing a tap washer) are usually repairs. Large-scale projects (e.g. full bathroom replacement) are typically capital improvements.
• Effect on character
  Repairs preserve the original character and function, while improvements alter or enhance them.
• Keep records and seek expert advice
  Because TR 97/23 often requires judgment, keep detailed documentation of costs and purpose. Engage a qualified quantity surveyor or tax professional to ensure compliance.

Understanding whether work on a rental property qualifies as a repair, maintenance, or capital improvement can be complex, particularly when tasks overlap. Repair work does not cease to be a ‘repair’ simply because it also serves a maintenance purpose, such as preventing or anticipating defects, damage or deterioration. Repairs may also occur alongside capital improvements.

As mentioned earlier, practical rule of thumb is to consider whether the work restores the property’s efficiency or function without altering its character. Minor improvements may still be classified as repairs, but substantial changes typically constitute capital improvements and are not deductible under section 25-10 of the ITAA 1997.

If ever in doubt, contact BMT Tax Depreciation for expert advice.

For certainty, BMT can provide expert advice and ensure your tax depreciation schedule is correctly updated.

A landlord undertakes a kitchen renovation in a rental property.

This example shows how one project can involve repairs, capital works and plant and equipment, each with different tax treatments under TR 97/23.

Correctly classifying property expenses for Taxation Ruling under TR 97/23 can be complex. A quantity surveyor registered with both the Australian Institute of Quantity Surveyors (AIQS) and the Tax Practitioners Board, such as BMT Tax Depreciation, can ensure your deductions are accurate and fully compliant with ATO requirements.

BMT Tax Depreciation can:

With both AIQS and Tax Practitioners Board accreditation, BMT Tax Depreciation ensures your claims are fully defensible and compliant.

For expert guidance or to request a tax depreciation schedule, call BMT Tax Depreciation on 1300 728 726 or Request a Quote.