Private ruling: Environmental protection activities
Date of advice: 2 December 2016
Published: May 2017
Ruling period: Income year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you entitled to a deduction under subsection 40-755(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of a replacing a structure that is used in the business with an upgraded one? | A1: No

Relevant facts and circumstances: You operated a business of supplying a certain service from a leased premise. You became aware of a contamination of pollutant from a structure used in supplying the service. The pollutant contaminated the surrounding areas. You engaged several specialised entities who made thorough examination of the site and suggested you, among other things, to replace the faulty structure with an ungraded one. Accordingly you have replaced the faulty structure with the upgraded one. You have ceased the operation of the business within a few months of upgrading the structure. You have not received any compensation or payment from any party in respect of the new structure.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-755 | Income Tax Assessment Act 1997 section 40-760

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified . Section 40-755 deals with deductions for environmental protection activities. Subsection 40-755(1) states that you can deduct expenditure you incur in an income year for the sole or dominant purpose of carrying on environmental protection activities. Subsection 40-755(2) defines environmental protection activities as any of the following activities that are carried on by you or for you: (a) preventing, fighting or remedying: (i) pollution resulting, or likely to result, from your earning activity (ii) pollution of or from the site of your earning activity (iii) pollution of or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity, (a) treating, cleaning up, removing or storing: (i) waste resulting, or likely to result, from your earning activity (ii) waste that is on or from the site of your earning activity (iii) waste that is on or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity. No other activities are environmental protection activities. The term 'your earning activity' is defined in subsection 40-755(3) as: an activity you carried on, carry on or propose to carry on: (a) for the purpose of producing assessable income for an income year (except a net capital gain) (b) for the purpose of exploration or prospecting; or (c) for the purpose of mining site rehabilitation; or (d) for purposes that include one or more of those purposes. No deduction is allowed under section 40-760 for: (a) expenditure for acquiring land; or (b) capital expenditure for constructing a building, structure or structural improvement; or (c) capital expenditure for constructing an extension, alteration or improvement to a building, structure or structural improvement; or (d) a bond or security (however described) for performing environmental protection activities; or (e) expenditure to the extent that you can deduct an amount for it under another provision of the taxation legislation; or (f) expenditure incurred in carrying out an activity for an environmental impact assessment of your project. Your earning activity was operating a service industry from a rented premise. During the course of your earning activity, you became aware of contamination of the site. Accordingly, you exercised due diligence and hired professionals to undertake testing and analysis of the site. The professionals recommended you to remove the impacted pollutants from the surrounding environment and replace the structure employed in the business with an upgraded one. The cost of installing the upgraded structure was an act of environmental protection activity as it prevented further pollution from the earning activity into the surrounding environment. However replacement of the structure was not for the sole and dominant purpose of carrying on environmental protection activities. Without the replacement of the structure, you would not have been able to carry out your business. It is more fundamental to your earning activity. The term sole or dominant purpose is not defined for the purpose of subsection 40-755(1). Former section 82BK of the Income Tax Assessment Act 1936 (ITAA 1936) was repealed and ultimately replaced with section 40-755. The Explanatory Memorandum to the Taxation Laws Amendment Act (No. 5) 1992 (the EM), which introduced former section 82BK of the ITAA 1936, provides guidance in interpretation of section 40-755. It stated that: Expenditure will only be for the sole or dominant purpose of carrying on an eligible environment activity if it is primarily directed to that environment protection activity. A deduction will not be available if the protection of the environment is only a residual or subsidiary purpose of the taxpayer. The EM used the following example to clarify this explanation: ...suppose a taxpayer who operated a dump covers it with soil and plants it with grass and trees at the end of its life. This might have the dual purposes of protecting the environment by preventing noxious substances leaching out and beautifying the site to improve its resale value. If the landscaping is primarily to improve the resale value of the site it will not be deductible as allowable environment protection expenditure. Where environmental protection expenditure is incurred for two or more purposes (for example protecting the environment as well as improving the resale value of the site), it is necessary to establish the dominant purpose of that expenditure. The dominant purpose for replacing the structure was to address the defect in the property so as to upgrade the property to a state that was suitable to carry out the business. The dominant purpose was not to carry out environmental protection activities. Further, paragraph 40-760(1)(b) provides that you cannot deduct capital expenditure under section 40-755 for construction of a structural improvement. Therefore you are not entitled to deduction under subsection 40-755(1) for the expenditure incurred in relation to the upgraded structure.