Private ruling: Replacement of asbestos roof
Published: April 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

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

Relevant facts and circumstances: You own a property which you use to earn rental income. The property has an asbestos roof. You have decided to remove the roof and replace it with the modern equivalent. There will be no structural changes made to the roof. The work will be completed in the 2013-14 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-755 | Income Tax Assessment Act 1997 Section 40-755(2)

Reasons for decision: Summary: You are entitled to claim a deduction for the cost of removing and replacing the asbestos roof at the property as this is an environmental protection activity. | Detailed Reasoning - Repairs: 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. Accordingly, it takes its ordinary 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 and contemplates the continued existence of the property. The removal and replacement of the asbestos roof will not qualify as there are no existing defects, damage or deterioration to the roof. The expense is considered to be capital in nature and therefore not deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Environmental protection activities: Section 40-755 of the ITAA 1997 deals with deductions for environmental protection activities. Environmental protection activities are 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, or (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, (b) 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, or (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. The term 'your earning activity' is defined in subsection 40-755(3) of the ITAA 1997 to be 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 (c) for the purpose of mining site rehabilitation, or (d) for purposes that include one or more of those purposes. No deduction is allowable under section 40-755 of the ITAA 1997 for (a) capital expenditure for constructing a building, structure or structural improvement (b) capital expenditure for constructing an extension, alteration or improvement to a building, structure or structural improvement, or (c) expenditure to the extent that you can deduct an amount for it under another provision of the taxation legislation. You earn assessable income by renting the property. The replacement of the roof is not considered to be a structural improvement as you have merely used the modern equivalent to replace the asbestos roof and have not changed the roof's structure. Accordingly, the replacement of the asbestos roof is considered to be environmental protection activity with the sole or dominant purpose of preventing pollution of the site of your income earning activities by asbestos. Therefore you are entitled to a deduction for the cost of replacing the asbestos roof under section 40-755 of the ITAA 1997.