Private ruling: Deductibility of demolition expenses
Date of advice: 18 September 2017
Published: February 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the expenses incurred in demolishing your outbuilding deductible expenses? | A1: No.

Relevant facts and circumstances: You are a joint owner of an investment property with your spouse that is rented out to tenants. You received notification from your local council that an inspection by a building compliance officer found that your outbuilding did not comply with parts of the Building Act 1993 (X). A building notice was issued with the letter stating: 3.1 The building is a danger to property 3.2 the building is a danger to the life, safety or health of members of the public or any person using the building in that: 3.2.1 the outbuilding wall located on the northern boundary wall has cracked and bowed and internal timber pitching plates have rotted away You were asked to engage the services of a Registered Building Practitioner in the category of Structural Engineer to inspect and report on the structural integrity of the whole of the outbuilding. You were then asked to provide this report to the Municipal Building Surveyor. A Registered Building Practitioner provided a report. In the report it stated: “The engineer recommends that the outbuilding has reached its design life and based on a number of deficiencies in the original design, the movement of the foundations causing cracking in the brickwork, and corrosion of the roof sheeting, it should be demolished”. The local council agreed with the proposed method of remediation however the planning department required a planning application to be made before the building permit for demolition could be obtained. The following expenses were incurred in demolishing the outbuilding: ● Title search statement ● Application for planning permit fee ● Asset protection permit fee ● Costs of disconnecting electricity ● Costs of actually demolishing the outbuilding The building contained asbestos.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-775

Reasons for decision: Summary: Demolition costs of uncompliant existing structures on land are not generally deductible as they are a capital expense. They are also not considered a repair. However section 40-755 of the ITAA 1997 provides a deduction for expenditure incurred for the sole or dominant purpose of carrying on environmental protection activities. Environmental protection activities are exhaustively defined in s 40-775(2). They relate exclusively to preventing, fighting or remedying pollution or treating, cleaning up, removing or storing waste, Pollution is not defined. The Explanatory Memorandum accompanying the Taxation Laws Amendment Bill (No 5) 1992 noted that: “Pollution has its ordinary common sense meaning”. Pollution will include contamination by harmful, or potentially dangerous substances such as explosive chemicals and greenhouse gases, and will include noise pollution. It will also include contamination by elements which once may not have been considered to be pollutants but which are now so considered because more is now known about their effects, for example asbestos and CFC’s”. It is also noted in the Explanatory Memorandum: “Preventing, combating or rectifying pollution of the environment will not include….removing a structure no longer used by the taxpayer. The removal of a redundant structure because it is unattractive or is likely to collapse will not be an environment protection activity”. The Explanatory Memorandum indicates the Parliament has taken a restrictive view of what constitutes pollution. This would be limited to activities relating to removing harmful or potentially dangerous materials. If the sole and dominant purpose is to demolish the outbuilding due to structural defects then this would not constitute an environment protection activity. We note that your building report stated that the outbuilding contained asbestos. Asbestos would be considered to be a harmful pollutant and its removal would constitute the carrying on of an environmental protection activity. However this was not mentioned as the sole or dominant reason that the building needed to be demolished. | Detailed Reasoning - Conclusion: The expenses incurred in demolishing your outbuilding were not incurred for the sole and dominant purpose of carrying on environmental protection activities. Therefore all expenses involved in demolishing the outbuilding are not deductible.