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Ruling

Subject: Deductibility of environmental protection activities

Question 1

Are you entitled to a deduction for the cost of testing and cleaning up a contaminated site?

Answer

Yes.

Question 2

Are you entitled to a deduction for the decline in value of fencing erected around a site where environmental protection activities are undertaken?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2008

You own a property which was leased to a business. Fuel was kept on the site many years.

The business has ceased its operations.

The property has been contaminated by leaking fuel tanks. Both soil and the water table below ground were contaminated.

The site was classified as a Suspected Contaminated Site by the relevant state environmental department.

You were required to assess the environmental risk and possible exposure danger to future employees, visitors, the public and any workmen on the site.

You commissioned an environmental report, testing and assessment.

To reduce the level of contamination you have:

§ removed the tanks

§ cleared the ground where the tanks were stored

§ removed a concrete pad

§ filled the ground with clean soil

§ disposed of asbestos

§ continued to test the soil and water table

§ placed wells on the site to facilitate water testing

§ removed all diesel contaminated soil

§ fenced the property to prevent the public gaining access to the site.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 8-5

Income Tax Assessment Act 1997 Section 12-5

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-70

Income Tax Assessment Act 1997 Section 40-75

Income Tax Assessment Act 1997 Section 40-755

Income Tax Assessment Act 1997 Section 40-760

Reasons for decision

Summary

You are entitled to claim an immediate deduction for the cost of testing of the contaminated soil and water including the sinking of the test wells, the removal of contaminated soil, asbestos, concrete slab, petrol and diesel tanks and the replacement soil as these are environmental protection activities.

The cost of the fence erected around your property is not an immediate deduction as this is not an environmental protection activity. The fence is a depreciating asset and deductions are allowable for the decline in value of the fence claimed over its effective life.

Detailed reasoning

You are entitled to deduct from your assessable income outgoings or losses that are categorised as either general or specific deductions.

General deductions are those deductions which are allowable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and relate to the gaining or producing of your assessable income or were necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Excluded from these deductions are losses or outgoings of capital, of a capital, domestic or private nature, which relate to the earning of exempt income or the legislation prevents you from deducting it.

Environmental protection activities

Section 40-755 of the ITAA 1997 deals specifically with deductions for environmental protection activities.

Environmental protection activities are any of the following activities that are carried on by you or for you:

(a) preventing, fighting or remedying:

(i) pollution resulting, or likely to result, from your earning activity

(ii) pollution of or from the site of your earning activity

(iii) pollution of or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity,

(b) treating, cleaning up, removing or storing:

(i) waste resulting, or likely to result, from your earning activity

(ii) waste that is on or from the site of your earning activity

(iii) waste that is on or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity.

The term 'your earning activity' is defined in subsection 40-755(3) of the ITAA 1997 to be an activity you carried on, carry on or propose to carry on:

(a) for the purpose of producing assessable income for an income year (except a net capital gain)

(b) for the purpose of exploration or prospecting

(c) for the purpose of mining site rehabilitation

(d) for purposes that include one or more of those purposes.

The term 'your earning activity' has been extended to include situations where your activity consists of leasing a site you own, or granting a right to use a site you own or control, or a similar activity involving a site. This means you can deduct your expenditure on environmental protection activities relating to the site, even if the pollution or waste is caused by another entity that uses the site.

No deduction is allowable under section 40-755 of the ITAA 1997 for:

(a) expenditure for acquiring land

(b) capital expenditure for constructing a building, structure or structural improvement

(c) capital expenditure for constructing an extension, alteration or improvement to a building, structure or structural improvement

(d) a bond or security (however described) for performing environmental protection activities

(e) expenditure to the extent that you can deduct an amount for it under another provision of the taxation legislation

(f) expenditure incurred in carrying out an activity for an environmental impact assessment of your project.

You earned your income in previous financial years by leasing a site to an entity which operated a business on the site. As a result of their business activity, the site has become polluted through fuel leakages.

The leasing of a site comes within the extended definition of 'your earning activity' and thus you may be eligible for a deduction for the cost of environmental protection activities undertaken.

You have undertaken testing and analysis of the site, removed leaking fuel tanks and asbestos, removed contaminated soil and installed wells to assist in the testing process. You have replaced contaminated soil with new soil. You have not undertaken any construction, alterations or improvements to the site.

As the activities you have undertaken fall within the definition of environmental protection activities for the purposes of the taxation legislation you are entitled to claim a deduction for the cost of those activities in the year in which they were incurred.

A deduction is allowable under section 40-755 for the cost of the environmental protection activities you have undertaken to decontaminate your property.

The deduction is limited to the cost of testing of the contaminated soil and water including the sinking of the test wells, the removal of contaminated soil, asbestos, concrete slab, petrol and diesel tanks and the replacement soil.

The cost of erecting a fence is not an environmental protection activity. Deductions relating to the fence are discussed below.

Decline in value of a depreciating asset

Section 40-25 of the ITAA 1997 provides a basis for writing off the capital cost of depreciating assets over their estimated effective life where the item is owned by you and either used during the year of income or installed ready for use for the purpose of earning your assessable income.

You may choose to determine the effective life of the asset or can use the effective life determined by the Commissioner. The effective life of depreciable plant is listed in Taxation Ruling TR 2010/2.

The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose. This is known as a depreciating asset's start time.

You are allowed to choose between one of the two methods to work out the decline in value of your depreciating assets. These methods are the diminishing value method (section 40-70 of the ITAA 1997) and the prime cost method (section 40-75 of the ITAA 1997).

You may have an immediate deduction under subsection 40-80(2) of the ITAA 1997 when the total cost of an item that you started to hold in the income year does not exceed $300.

If the depreciating asset is only used, or available for use, for income producing purposes for part of the year, the decline in value deduction must be apportioned on a time basis.

The cost of a depreciating asset consists of two elements.

The first element of cost is, generally, amounts you are taken to have paid to hold the asset such as the purchase price. The amounts must be directly connected with holding the asset.

The first element of cost is worked out as at the time you begin to hold the asset.

The second element of cost is, generally, amounts you hare taken to have paid after that time to bring the asset to its present condition and location, such as the cost of improving the asset.

The fence used to enclose your property is a depreciating asset. As such, its cost is not immediately deductible under section 8-1 of the ITAA 1997. Instead, deductions will be allowed over the effective life of the fence.

A deduction will be allowed under section 40-25 of the ITAA 1997 for the decline in value of the fence erected to enclose the property on which you are carrying out environmental protection activities.