Private ruling: Rental property repairs and temporary relocation of tenants
Date of advice: 22 July 2016
Published: September 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will you be entitled to a deduction for the cost of removing and replacing the asbestos walls and ceiling and fittings of the bathroom of your rental property? | A1: Yes. | Q2: Will you be entitled to a deduction for the cost of providing alternate accommodation for your tenants while the work to the bathroom is carried out? | A2: Yes.

Relevant facts and circumstances: You are the owner of a rental property in which the wall tiles in the bathroom shower recess have become detached due to water ingress. To identify the source of the water the wall space must be accessed. The wall and ceiling linings have been professionally identified as containing asbestos, and the qualified contractors also stated that a partial removal of the asbestos was not permitted under health and safety regulations. All of the asbestos material must be removed in its entirety. You have received notification that your rental property will not be habitable for a period of time while asbestos removal and repairs are carried out. This will mean extensive relining of the entire bathroom and fittings to return it to a habitable condition. Your tenants have been occupying the property, and will continue for an indefinite period. The property has only one bathroom. You have arranged to pay for alternate accommodation for your tenants until the work is completed. The tenants will continue paying rent to you while they are in the alternate accommodation.

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

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. The removal of all walls and ceiling of the bathroom may not fully qualify as a repair for the purposes of section 25-10 of the ITAA 1997 as all of the walls and ceiling 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. Therefore, a deduction is not allowed under 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 walls and floor 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 walls and floor of your rental property under section 40-755 of the ITAA 1997. | Detailed Reasoning - Accommodation expense: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that 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. Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 ( Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). Therefore, providing the expense can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, the expense will be 'incidental and relevant' to the income earning activities of the taxpayer. In your case as a landlord, it is expected that you are to provide premises which are fit for occupation. However due to the extent and nature of the work you had to relocate your tenants so that work to the property could be undertaken and as a result incurred a cost to relocate your tenants to temporary accommodation. Your tenants continued to pay you rent during the time they were in the alternate accommodation. In these circumstances your expenditure can be viewed as a natural consequence of your income earning activities as a landlord and therefore 'incidental and relevant' to the derivation of rental income. Accordingly, you are entitled to a deduction for the expenditure incurred to relocate your tenants to short term accommodation under section 8-1 of the ITAA 1997.