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Edited version of private ruling
Authorisation Number: 1011828968882
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Ruling
Subject: Rental property expenses
Question 1
Are you entitled to a deduction for the cost of removing and replacing the asbestos roof and insulation on your commercial property?
Answer
Yes.
Question 2
Are you entitled to a deduction for the costs of replacing the guttering on your commercial property?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You are the owner and lessor of a commercial rental property.
The property was originally built many years ago and with extensions added the original roof was replaced with asbestos.
More than half of the gutting on the building was damaged after a severe storm. Thus the guttering due to the age, deterioration and damage did not function correctly and was replaced. The old guttering had been in place since the renovations were carried out.
No one would repair the guttering without the asbestos roofing being removed.
You incurred expenses in removing and replacing the roof and insulation to enable the guttering to be repaired to its original state.
The roofing was replaced with Colour Bond roofing as per building standards.
The replacement of the roof was for the sole and dominant purpose of preventing contamination or pollution of the site under duty of care owed to the tenants under common and state law.
You have not made any claim under insurance for the replacing the guttering due to the environmental issues.
Detailed reasoning
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.
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 which deals with 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, 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. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710 ( Thomas' case ) 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 the exact repetition of form or material that is significant.
Replacement of guttering
You have replaced the guttering to your rental property as it was damaged by a severe storm. The work carried out restores the function of guttering to its original state. The repairs are not capital in nature. Therefore, you are entitled to a deduction for repairs to the guttering under section 25-10 of the ITAA 1997.
Asbestos roofing and insulation
The replacement of the asbestos roof and insulation does not constitute a repair as there was no existing defects, damage or deterioration to the roof or insulation. 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 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 were carrying on environmental protection activities pursuant to subparagraph 40-755(2)(a)(ii) of the ITAA 1997 when the asbestos roof was removed and insulation 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 replacing the asbestos roof and insulation of your rental property under section 40-755 of the ITAA 1997.
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