Private ruling: Rental property expenses
Published: May 2014
Ruling period: Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to a deduction for the cost of removing asbestos and holding costs? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-5 | Income Tax Assessment Act 1997 Section 12-5 | Income Tax Assessment Act 1997 Section 40-755 | Income Tax Assessment Act 1997 Section 40-755(2)

Reasons for decision: Summary: Section 8-1 of the Income tax Assessment Act 1997 (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, or relate to the earning of exempt income. Section 8-5 of the ITAA 1997 provides that a specific deduction is allowed for an amount that is made deductible under another provision. Section 12-5 of the ITAA 1997 lists those provisions which allow specific types of deductions. Contained in this list is section 25-10 of the ITAA 1997 which deals with repairs and section 40- 755 of the ITAA 1997 which deals with deductions for environmental protection activities. | Detailed Reasoning - Asbestos: 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. 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 were carrying on environmental protection activities when the asbestos was removed and replaced. Therefore, you are entitled to a deduction for the cost of removing asbestos from your property. | Detailed Reasoning - Holding costs: The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals. It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case) , the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates, insurance and interest. Taxation Ruling TR 2004/4, in considering the above decision, concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances: • the interest is not incurred too soon, is not preliminary to the income earning activities, and is not a prelude to those activities • the interest is not private or domestic • the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost • the interest is incurred with one end in view, the gaining or producing of assessable income, and • continuing efforts are undertaken in pursuit of that end. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future. In your case, you have held the rental property for a number of years and it has been continuously rented during that time. As the result of a flood which damaged the property, you undertook repairs and renovations. You did not rent the property during the year because of the work being undertaken. However, as soon as the work was completed, you have again rented the property. It is considered that the conditions set out in TR 2004/4 are met and therefore you are entitled to a deduction for holding expenses including rates, insurance and interest.

Relevant facts: You have owned an investment property for a number of years. | As the result of the 20XX floods, your property sustained damage. | While rectifying the cleaning and damage, it was found that there was asbestos damage in the house. | The contractors you approached for rectification of the damage all believed that the asbestos ceilings had to be removed. | In addition to the internal asbestos, there were also issues with the external asbestos soffits which were not the result of the floods. | Repair work for the asbestos issue was undertaken in August 20YY and completed in January 20ZZ. You were then able to undertake the other repairs needed because of the flood damage. | The property became tenanted in March 20AA. | You did not receive any income from the property during the 20YY-ZZ financial year.