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Edited version of your written advice
Authorisation Number: 1051358264235
Date of advice: 16 April 2018
Ruling
Subject: Claiming a deduction for the removal of Asbestos and Formaldehyde material.
Question 1
Are you entitled to a deduction for your share of the expenses incurred for the removal of asbestos and formaldehyde material from a rental property and the remediation costs to put the property back to its original condition under section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 2
Are you entitled to claim costs incurred by third parties?
Answer
No
This ruling applies for the following periods:
Period ended 30 June 2017
Period ending 30 June 2018
The scheme commences on:
01 July 2016
Relevant facts and circumstances
The property was located in Australia.
This property was built approximately 60 years ago.
The property was rented.
The property is owned by two individuals.
There was no pre-purchase report for the property obtained by the owners.
A routine inspection from the property managers identified that general remediation was required. Due to these issues it was decided not to renew the lease so all the maintenance issues could be addressed to bring the property up to standard. The property manager did not identify any asbestos issues.
The property was vacated; the tenants were told that once their lease was up, it would not be renewed.
Maintenance work commenced, asbestos issues were discovered resulting in work being stopped until later when the asbestos removal commenced.
A quote was provided for the removal and disposal of the exterior asbestos cement sheet wall claddings, flashings and eaves linings at the property.
The external Asbestos panels had mostly been painted over. A count of the number of damaged panels was not made.
The state of the formaldehyde insulation in the ceiling was discovered after the commencement of the removal of the external asbestos sheeting.
A letter from a company commissioned by the individual owners to remove asbestos from the investment property was provided. The following was contained in their letter
- For this property, to continue as a long term and short term rental property, the asbestos should be removed as it poses a definite environmental health risk to any future occupants.
- The external asbestos cladding had numerous damaged and friable sections; the owners wish to remove all the external asbestos as they see it as a duty of care to do so, for future occupants.
- The internal walls of the property were also 75% clad with asbestos of which much had broken edges, e.g. door and window openings, which have made it necessary to remove it, for the same environmental health reasons.
- An 8 metre by 4 metre section of floor had to be removed to access old broken pieces of asbestos that was removed from a previous extension.
- Upon removal of the asbestos, it was also found that the property had a sprayable foam insulation in the ceiling cavity, which had broken down into a powder form of which had significant amounts of Formaldehyde in it. This was also proving to be an environmental health risk as well.
The property has not been rented since remediation commenced, but once remediation is completed it will be tenanted again.
Invoices provided show multiple entities actually incurred costs in relation to the work.
Improvements identified the underfloor insulation is not being claimed.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 40-755
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 25-10
Reasons for decision
Question 1
Section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction for expenditure you incur for the sole or dominant purpose of carrying on environmental protection activities. Paragraph 40-755(3)(a) further clarifies an earning activity is an activity you carried on, carry on, or propose to carry on for the purpose of producing assessable income for an income year (except a net capital gain);
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).
The environmental protection provisions are provisions of last resort. If a deduction is allowable under another provision of the ITAA 1997, the expenditure is not deductible under section 40-755 of the ITAA 1997.
In your case, the replacement of the external cement sheet wall claddings, flashings, eaves linings, internal walls, flooring and ceiling insulation does not constitute a repair as there were no substantial existing defects, damage or deterioration. 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 25-10 of the ITAA 1997.
It is considered that your sole or dominant purpose in replacing the undamaged external cement sheet wall claddings, flashings, eaves linings, internal walls, flooring and ceiling insulation was to prevent pollution of the site of your income earning activity by asbestos and formaldehyde. Also this work is not considered to be an extension, alteration or improvement to the building as it was merely, replacing the external cement sheet wall claddings, flashings, eaves linings, internal walls, flooring and ceiling insulation with its modern equivalent.
Therefore, you are entitled to a deduction for the total cost of removing asbestos and formaldehyde materials from your rental property and the reinstatement costs to return the affected areas back to their original condition.
Question 2
The property is owned by individuals therefore invoices to a third party are not expenses incurred by the property owners, consequently they are not deductible.
A deduction is only allowable if a loss or outgoing:
a) is actually incurred;
b) meets the deductibility tests; and
c) satisfies the substantiation rules where applicable.
Invoicing from suppliers list third parties as incurring expenses. These expenses cannot be claimed as the invoiced entities are not the property owners.
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