Private ruling: Rental property deductions
Published: September 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will you be entitled to a deduction for the cost of removing and replacing the asbestos materials to your rental property? | A1: Yes.

Relevant facts and circumstances: You are considering purchasing a rental property. The property contains asbestos. To prevent any future pollution to tenants, you intend to remove the asbestos and rebuild with conventional building materials. There will be no capital improvements to the house. The floor plan of the house will not change. You state that the repairs you intend to make to the property will fit within the Commissioner's guidelines as contained in Taxation Ruling TR 97/23 and Interpretive Decision ATO ID 2002/330.

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 and | Income tax Assessment Act 1936 Subsection 82BM(2).

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. Additionally, if work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred. The removal of the asbestos materials may not fully qualify as a repair for the purposes of section 25-10 of the ITAA 1997 as all of the areas 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. Furthermore, the repairs would be considered initial repairs as the damage to the property was known before acquisition. Therefore, a deduction is not allowed under section 8-1 of the ITAA 1997 or 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 materials are 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 asbestos materials of your rental property under section 40-755 of the ITAA 1997.