Edited version of private ruling

Authorisation Number: 1011484806038

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Ruling

Subject: Repair/environmental protection activities with regards to an asbestos roof

Is a deduction allowable for the cost of removing and replacing the asbestos roof of your leased commercial property with a colorbond steel roof?

Yes.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The entity owns a commercial property which consists of a building which is over 40 years old. The property is leased out to tenants.

The original damaged roof will be removed and replaced with a roof made of colorbond steel.

The property has been owned for a substantial period of time. The roof is in a very poor state with cracking and flaking over the majority of the roof. The roof has been leaking for a period of time and you have been continuously trying to seal it with silicon, but it had got beyond that stage. The tenants had an insurance claim for spoilage of goods from water leaking through the roof. Because of the flaking and porous nature of the material, the asbestos is a health risk and this was the dominant purpose for replacing the asbestos with colorbond material.

Reasons for decision

Summary

The cost of removing the old asbestos roof and replacing it with a colorbond roof is an allowable deduction. The roof is damaged due to the break down of the asbestos material which is cracking and flaking, which means it is becoming porous, allowing water to leak through. It is also a health risk as the asbestos is now exposed. The parts of the roof that will be replaced due to the poor physical state are deductible as a repair and the parts that will be replaced due to the health risk created due to the state of the material are deductible as an environmental protection activity.

Detailed reasoning

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 the whole asbestos roof may not fully qualify as a repair for the purposes of section 25-10 of the ITAA 1997 as the whole of the roof may not be in a state of physical disrepair.

However, the removal and replacement of the damaged sections of the roof would qualify as a repair under section 25-10 of the ITAA 1997.

Paragraph 88 of TR 97/23 states that a repair involves a restoration of something without changing its character. The significant factor is the restoration of efficiency rather than exact repetition of form or material.

It is considered the work required to correct the damaged areas of the roof constitutes a repair as the change in materials using the colorbond did not improve the efficiency or function. The work undertaken to damaged areas of the roof indicates these areas of the roof have merely been repaired by its modern equivalent and restored the original function. Therefore, you are entitled to a deduction under section 25-10 of the ITAA 1997 for the repairs to the damaged areas of the roof.

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 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 such as asbestos) in the circumstances specified in paragraph 40-755(2)(a) of the ITAA 1997. Also included are activities in treating, cleaning up, removing or storing of waste in the circumstances specified in paragraph 40-755(2)(b) of the ITAA 1997. The pollution or waste must be of, on or from a site on which you carry on an activity for the purpose of producing assessable income.

In your case you were carrying on environmental protection activities when any undamaged portion of the asbestos roof were removed with the sole or dominant purpose of preventing pollution of the site of the earning activities. This work is not considered to be an extension, alteration or improvement to the building as it is merely replacing the asbestos items with the same items made from colorbond. Therefore, you are entitled to a deduction under section 40-755 of the ITAA 1997 for the expense incurred in replacing any undamaged part of the asbestos roof on your rental property. The environmental protection provisions are provisions of last resort. Paragraph 40-760(1)(e) of the ITAA 1997 provides that if a deduction for environmental protection activities is allowable under another provision of the ITAA 1997, the expenditure is not deductible under 40-755 of the ITAA 1997.

You will need to determine the percentage of the roof that was actually damaged and claim that portion as a repair. The remaining part of the roof that was not damaged but was replaced can be claimed as an environmental protection activity.