Private ruling: Rental-Expenses prior to renting
Date of advice: 26 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Questions and answers | Are you entitled to a deduction for the cost of environmental protection activities undertaken prior to your property producing assessable income? | Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 40-755 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Section 40-25

Reasons for decision: Summary: Section 40-755 of the ITAA 1997 provides a deduction for expenditure you incur for the sole or dominant purpose of carrying on environmental protection activities. Environmental protection activities are listed in subsection 40-755(2) of the ITAA 1997. One class of environment protection activities is: preventing pollution of or from the site of your earning activity (subparagraph 40-755(2)(a)(ii) of the ITAA 1997) 'Your earning activity' is, among other things, an activity you carry on, or propose to carry on for the purpose of producing assessable income (except a net capital gain). In defining the site of 'your earning activity', subsection 40-755(4) of the ITAA 1997, includes 'leasing a site you own'. Former subsection 82BM(2) of the Income Tax Assessment Act 1936 (ITAA 1936) was repealed and ultimately replaced with subsection 40-755(4) of the ITAA 1997.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, the lessor was carrying on environmental protection activities pursuant to subparagraph 40-755(2)(a)(ii) of the ITAA 1997 when the asbestos shed was demolished and removed with the sole or dominant purpose of preventing pollution of the site of the taxpayer's earning activities by asbestos. Earning activities are defined as those carried on for the following purposes: ● producing assessable income (other than a net capital gain) ● exploration or prospecting ● mining site rehabilitation. In your case, your property was not yet producing assessable income, however, it is clear that you carried out the works for the purpose of producing assessable income. Therefore, you are entitled to claim an outright deduction for all costs relating to the environmental protection activities.

Relevant facts: You and your spouse began some improvements your main residence with the intention of using it as a rental property in the future. | During some landscaping work you discovered asbestos under the soil in your yard surrounding the house. | You incurred costs to have the asbestos removed and re-surfacing of the yard. | After discussions with a real estate agent the property was made available for rent from #. | You incurred costs for the asbestos removal and re-surfacing of the yard.