Private ruling: Rental deductions for tree and asbestos contamination removal
Date of advice: 20 December 2018
Published: April 2019
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 201xx

Ruling: Q1: Are you entitled to a deduction under section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure incurred in the removal of asbestos affected areas, including the removal of a garage and carport, from your rental property? | A1: Yes | Q2: Are you entitled to a deduction under section 8-1 of the ITAA 1997 for expenditure incurred on tree removal? | A2: No | Q3: Are you entitled to a deduction under section 8-1 of the ITAA 1997 for expenditure incurred for landscaping? | A3: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are the joint owner of a rental property. Safety concerns arose when the tenant discovered exposed pieces of a material in the garden and requested you have them removed. A contractor was engaged to clean up the garden. Following the contractors work severe rain exposed further pieces in the rear of the yard. The tenant was also concerned about a garage constructed from asbestos and requested you undertake an asbestos review. You engaged an environmental company to inspect the area and provide recommendations. The company reported the exposed pieces were asbestos that appeared to have been buried and had contaminated the soil. The company provided reports which recommended the garage and contaminated soil be removed. You engaged a qualified asbestos removal company to remove the contaminated areas. Both the garage and a carport were demolished and have not been replaced. On completion of the asbestos removal works you obtained a clearance certificate. Further safety concerns arose regarding two trees on the property and council allowed for their removal. An application was submitted to the council requesting to have them removed. A Tree Officer from the council attended the premises and determined: ● the rear tree was in poor health and poor structural condition ● the middle tree had low amenity value and was supressed by the other two trees The trees were removed a professional tree lopping company. As a result of the soil removal, the area was landscaped and re-grassed.

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 40-775

Reasons for decision: Summary: You are entitled to a deduction for your share of the costs to remediate the asbestos affected areas of the property. You are not entitled to deduction for your share of the costs for landscaping or removal of the trees, including the stumps and roots. These expenses are capital in nature . | Detailed Reasoning - Asbestos Removal: Section 40-755 of the ITAA 1997 provides a deduction for expenditure you incur for the sole or dominant purpose of carrying on environmental protection activities. Paragraph 40-755(3)(a) of the ITAA 1997 further clarifies an earning activity ‘is an activity you carried on, carry on, or propose to carry on for the purpose of producing assessable income for an income year (except a net capital gain)’. Environmental protection activities are listed in subsection 40-755(2) of the ITAA 1997. One class of environment protection activities is: - ‘preventing pollution of or from the site of your earning activity’ (subparagraph 40-755(2)(a)(ii) of the ITAA 1997). The environmental protection provisions are provisions of last resort. If a deduction is allowable under another provision of the ITAA 1997, the expenditure is not deductible under section 40-755 of the ITAA 1997. In your case you have incurred expenses to have the asbestos removed from the property. You also incurred associated expenses to obtain approval for the removal of the asbestos. These expenses are 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 sections 8-1 of the ITAA 1997 or 25-10 of the ITAA 1997. It is, however, considered that your sole or dominant purpose in carrying out the work was to rid the affected areas of pollution on the site of your income earning activity by asbestos and prevent further contamination or deterioration. Therefore, you are entitled to a deduction for the total cost of removing asbestos from your rental property under section 40-755 of the ITAA 1997. | Detailed Reasoning - Tree Removal: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. Subsection 25-10(1) of the ITAA 1997 allows a deduction for expenditure incurred for repairs to premises (or part of premises), that you held or used solely for the purpose of producing assessable income. Capital expenditure, however, is not deductible under subsection 25-10(3) of the ITAA 1997. The removal of a tree, including its stumps and roots, is not a maintenance or repair expense and is similar to that which normally falls for consideration under section 25-10 of the ITAA 1997. Normally this is a one-off type expense that produces an enduring benefit, and is considered to be an improvement. In your case, you incurred expenses to remove two trees that were likely to cause damage to your rental property. The removal of trees is not considered to be a repair as there is no replacement or correction of defects in or damage to the trees. The trees were removed to eliminate any potential risk and are no longer in existence. As the removal of the trees is not actually repairing any damage, a repairs deduction is not allowable under section 25-10 of the ITAA 1997 Additionally, the expense is considered to be capital in nature as it is a one-off expense that provides an enduring benefit, that being, the removal of a potential hazard. As the expense is capital in nature, a deduction is also not allowable under section 8-1 of the ITAA 1997. Therefore, you are not entitled to a deduction for the expenses incurred to have the trees removed from your rental property. | Detailed Reasoning - Landscaping: Typically, deductible expenditure incurred to maintain a rental property will be ongoing and recurrent and is incurred to preserve the property and keep it in a rentable state; whereas non-deductible maintenance expenditure is typically one-off and provides an enduring benefit. Expenses incurred for repairs to a property used for income producing purposes are deductible providing the expenditure is not of a capital nature. Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is an allowable deduction. Generally a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. To repair property improves to some extent the condition it was in immediately before repair; however, a minor or incidental degree of improvement may be done to property and still be a repair. Where the work amounts to a substantial improvement and results in a greater efficiency of function in the property, the expenditure is not for repairs and is of a capital nature. An improvement involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property’s income producing ability, significantly enhance its saleability or market value or extend the property’s expected life. General garden maintenance is an allowable deduction where, for example, you pay someone to mow lawns, maintain garden beds or prune trees. However, landscaping is considered to be an improvement and therefore not an allowable deduction as a repair or as a deduction under section 8-1 of the ITAA 1997.