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Edited version of private ruling
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Ruling
Subject: Rental property expenses
1. Can you claim a deduction for repairing the damaged section of the roof of your rental property?
Yes.
2. Can you claim a deduction for replacing the undamaged section of the roof of your rental property?
Yes.
Relevant facts
You purchased a rental property and have rented it since purchase.
When the property became vacant and was advertised by you, you were unable to let the property out due to parts of the roof leaking.
Prior to new tenants moving in, you were required to repair portions of the roof. The roof was made of asbestos. Because of the material, it was not possible to repair the parts of the roof with like material, due to legislation and non availability. Because of the health issues you were also unable to repair the effected portions of the roof with a modern replacement in patches.
You replaced the whole roof with Colourbond steel material.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which 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.
As you were obtaining assessable income from the property you may be entitled to a deduction for expenditure incurred.
Section 8-5 of the ITAA 1997 provides that a specific deduction is allowed for an amount that is made deductible under another provision.
Section 12-5 of the ITAA 1997 lists those provisions which allow specific types of deductions. Contained in this list is section 25-10 of the ITAA 1997 about repairs and section 40-755 of the ITAA 1997 which deals with deductions for environmental protection activities.
Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income-producing purposes. However, a deduction is not allowed 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. Paragraphs 13 -16 of Taxation Ruling TR 97/23 specifically deal with the 'ordinary meaning of repairs'. 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.
In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.
TR 97/23 indicates that expenditure for repairs to property is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety. Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.
Section 40-755 of the ITAA 1997 allows a deduction for expenditure, including expenditure of a capital nature, incurred on or after 30 June 2001 by taxpayers for the sole or dominant purpose of carrying on eligible environmental protection activities.
These activities are the preventing, fighting or remedying of pollution (which includes contamination of the environment by harmful or such potentially dangerous substances as asbestos). Also included are activities in treating, cleaning up, removing or storing of waste. The pollution or waste must be of, on or from a site on which the taxpayer carried on, carries on, or proposes to carry on an activity for the purpose of producing assessable income.
A deduction for undertaking environmental protection activities is not allowable for the construction of a building, structure or structural improvement or for an extension, alteration or improvement to a building.
The environmental protection provisions are provisions of last resort. If a deduction for environmental protection activities is allowable under another provision of the ITAA 1997, the expenditure is not deductible under section 40-755 of the ITAA 1997.
Replacement of damaged sections of asbestos roofing
The replacement of the damaged sections of asbestos roofing with colourbond constitutes a repair as the change in material did not improve the efficiency of function. The roofing has merely been replaced by its modern equivalent and restored to its original function.
Therefore, you are entitled to a deduction for your share of the cost of replacing the damaged sections of roofing.
Replacement of undamaged sections of asbestos roofing
The replacement of the undamaged asbestos roofing does not constitute a repair as the there was no existing defects, damage or deterioration in the roofing. Also, 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. Therefore, a deduction is not allowed under section 8-1 or 25-10 of the ITAA 1997. Accordingly, it needs to be considered whether you are entitled to a deduction for environmental protection activities.
Removing and replacing with colourbond the undamaged asbestos roofing of a rental property that is used to produce assessable income constitutes an eligible environmental protection activity as it remedies an environmental pollutant. It is considered that your sole or dominant purpose in removing the undamaged roofing was therefore an eligible environmental protection activity. Also this work is not considered to be an extension, alteration or improvement to the building as it is merely, replacing the asbestos with its modern equivalent.
Therefore, you are entitled to a deduction for the replacement of undamaged asbestos roofing
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