Private ruling: Rental property expenses
Date of advice: 18 June 2018
Published: August 2018
Ruling period: Year ended 30 June 20xx | Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will you be entitled to a deduction for the cost of removing and replacing the asbestos components of your rental property? | A1: Yes. | Q2: Will you be entitled to a deduction for reasonable expenses associated with your tenants vacating the property while the work is carried out? | A2: Yes.

Relevant facts and circumstances: You have owned a rental property for many years. It is clad with fibro which has deteriorated in that time to a point where it must be removed and replaced. It is not reasonable to replace only the damaged sections, as the good sections can be disturbed in the process, which would release asbestos fibres. The deterioration has been caused by the building footings shifting, sun damage causing paint to flake off, electrical fittings maintenance, and general wear and tear due to usage. The asbestos material will be removed and replaced with a suitable replacement to make it suitable for ongoing tenancy. The property is currently tenanted. The current tenants will have to vacate for a short period of time while the recladding is carried out. You have discussed the situation with your tenants and expect to incur some compensation for them having to vacate the property while work is carried out. You expect the tenants to return to the property to continue their lease once the remedial work is completed. All work will be carried out by qualified tradespeople.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 8-1 | Income tax Assessment Act 1997 Section 25-10 | Income tax Assessment Act 1997 Section 40-755

Reasons for decision: Summary: Section 25-10 of the Income tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. The word 'repair' is not defined within the taxation legislation and therefore, it takes its conventional meaning. Taxation Ruling TR 97/23 states that the word 'repair' ordinarily means 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) and contemplates the continued existence of the property. The removal of all external wall cladding of the property may not fully qualify as a repair for the purposes of section 25-10 of the ITAA 1997 as all of the cladding may not be in a state of physical disrepair. The expense is considered to be capital in nature as it is a one-off cost that results in a lasting advantage, that is, the removal of the pollution risk to the property. Therefore, a deduction is not allowed under Section 25-10 of the ITAA 1997. Accordingly, we need to consider whether you are entitled to a deduction for environmental protection activities carried out to your rental property. Section 40-755 of the ITAA 1997 allows a deduction for expenditure you incur for the sole or dominant purpose of carrying on eligible environmental protection activities. One class of environmental protection activities is: preventing pollution of or from the site of your earning activity (subparagraph 40-755(2)(a)(ii) of the ITAA 1997) Former subsection 82BM(2) of the Income Tax Assessment Act 1936 (ITAA 1936) was repealed and ultimately replaced with subsection 40-755(4) of the ITAA 1997. The Explanatory Memorandum, to the Taxation Laws Amendment Act (No.5) 1992 ( the EM) which introduced former subsection 82BM(2), provides guidance in the interpretation of subsection 40-755(4)The EM stated that: …a taxpayer who earns income from leasing a site which he or she owns will be taken to be carrying on an income-producing activity on that site. The taxpayer will be entitled to a deduction (or depreciation) for environment activities. So a landlord may claim deductions for expenditure on environment activities. The EM further makes clear that pollution includes contamination by harmful or potentially dangerous elements such as asbestos. Accordingly, you will be carrying on environmental protection activities pursuant to subparagraph 40-755(2)(a)(ii) of the ITAA 1997 when the asbestos cladding is removed and replaced with the sole or dominant purpose of preventing pollution of the site of your earning activities by asbestos. Therefore, you are entitled to a deduction for the cost of removing and replacing the external asbestos cladding of your rental property under section 40-755 of the ITAA 1997. | Detailed Reasoning - Expense associated with tenants temporarily vacating.: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 ( Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). Therefore, providing the expense can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, the expense will be 'incidental and relevant' to the income earning activities of the taxpayer. In your case as a landlord, it is expected that you are to provide premises which are fit for occupation. However due to the extent and nature of the work you will request your tenants to vacate the property while the work is carried out. You expect that you will incur some form of compensatory expense because of this. You expect your tenants to resume their tenancy once the work is carried out. In these circumstances your expenditure can be viewed as a natural consequence of your income earning activities as a landlord and therefore 'incidental and relevant' to the derivation of rental income. Accordingly, you are entitled to a deduction for the expenditure incurred for your tenants to temporarily vacate the property under section 8-1 of the ITAA 1997.