Railway lines and sleepers have been removed from the 750m-long track and a new loop is going in to allow two trains to run on the line at the same time.
Ocean Beach Railway general manager Shane Murray said a digger, supported by a team of volunteers, had removed most of the track and sleepers at the weekend.
''It was starting to show its age, so it was time to start work on the upgrade.''
The new track would be laid in time for a charter trip organised for Labour Weekend.
It was one of the biggest projects in the history of Ocean Beach Railway, which has more than 85 members, and carried its first passengers in 1963.