Private ruling: Rental Property Deduction
Published: November 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to an outright deduction for your expenses incurred for the removal of asbestos material from a rental property under section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are you entitled to a 2.5% capital works deduction for all the new wooden paling fences? | A2: Yes.

Relevant facts and circumstances: You purchased a property which you use as a rental property. When purchasing the property you received a property inspection report. The report stated the property contained asbestos. You understood that the asbestos was in good condition and that the property would be perfectly fine to rent out as an investment. You subsequently found out that the asbestos had become friable and dangerous for the tenants. You engaged an asbestos removal company and found out that the asbestos wasn't in good condition. You then arranged for the demolition and removal of various asbestos structures. You replaced asbestos fencing with wooding paling fences.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-755 | Income Tax Assessment Act 1997 Paragraph 40-755(2)(a) | Income Tax Assessment Act 1997 Paragraph 40-755(2)(b) | Income Tax Assessment Act 1997 Section 40-760 | Income Tax Assessment Act 1997 Subsection 43-20(2) | Income Tax Assessment Act 1997 Subsection 43-20(3)

Reasons for decision: Summary: Section 40-755 of the ITAA 1997 allows a deduction for expenditure, including expenditure of a capital nature, incurred on or after 30 June 2001 by taxpayers for the sole or dominant purpose of carrying on eligible environmental protection activities. These activities are the preventing, fighting or remedying of pollution (which includes contamination of the environment by harmful or such potentially dangerous substances as asbestos) in the circumstances specified in paragraph 40-755(2)(a) of the ITAA 1997. Also included are activities in treating, cleaning up, removing or storing of waste in the circumstances specified in paragraph 40-755(2)(b) of the ITAA 1997. The pollution or waste must be of, on, or from a site on which the taxpayer carried on, carries on, or proposes to carry on, an activity for the purpose of producing assessable income. Section 40-760 of the ITAA 1997 places limits on deductions from environmental protection activities. It states in part that you cannot deduct an amount under section 40-755 for an income year for capital expenditure for constructing a building, structure, or structural improvement. In your case, the asbestos structures were demolished and removed with the sole purpose of preventing pollution of the site of your income earning activities. You are therefore entitled to a deduction under section 40-755 of the ITAA 1997 for the demolition of, and removal of, asbestos which was located on your investment property. However, the cost of the wooden fences which replaced the asbestos fences is not deductible as an environmental protection activity. A 100% deduction is not allowable for the cost of the new wooden paling fences under either the general deduction provision (section 8-1 of the ITAA 1997) or the repairs provision (section 25-10 of the ITAA 1997) as this expenditure is capital in nature. However, under Division 43 of the ITAA 1997 a deduction is allowed at the rate of 2.5% per annum for construction expenditure on capital works used for income producing purposes. Subsection 43-20(2) of the ITAA 1997 states Division 43 applies to capital works begun after 26 February 1992 that are structural improvements, or extensions, alterations or improvements to structural improvements, whether they are in or outside Australia. Subsection 43-20(3) of the ITAA 1997 gives some examples of what are structural improvements. Fences are considered a structural improvement. In your case you replaced the asbestos fences with wooden paling fences and replaced a wooden fence, which was falling down, with a new wooden paling fence. As the wooden fences are considered structural improvements they are covered under Division 43 of the ITAA 1997. You are entitled to a deduction for the construction of all the wooden paling fences under Division 43 of the ITAA 1997.

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