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Ruling

Subject: Rental property deductions - asbestos removal

Question:

Are you entitled to a deduction for the expenses incurred in engaging a relevant expert and an asbestos removal contractor?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You acquired a property more than 10 years ago. At the time of acquisition the property was in good condition.

The property has been leased to tenants.

Some fragments of suspected asbestos were discovered at the premises.

You engaged a relevant expert to assess the premises and prepare a report detailing the nature and extent of any asbestos and any recommendations for the removal of any hazards.

Asbestos fibres were detected in some dust samples taken from the property. The expert's report concluded that the asbestos fibre contamination was caused by weathering to part of the building. Other than releasing some asbestos fibres, the part of the building that was the source of the asbestos was in good condition.

It was recommended that a friable asbestos removal contractor be engaged to remove all friable asbestos contaminated dust from the premises. Additionally, it was recommended that the part of the building that was the source of the asbestos be sealed with paint across its entire area.

These works were completed by suitably qualified contractors.

The required clearance inspection certificate was obtained by the expert following the completion of the works prior to the affected area being re-occupied by the tenants.

As per the recommendations, you also had the expert conduct an asbestos survey and prepare an asbestos register to be kept on site to ensure any remaining asbestos was identified and is properly managed to reduce any asbestos related hazards to the occupants of the premises.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-755

Reasons for decision

Summary

The expenses incurred in engaging a relevant expert and an asbestos removal contractor are not deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) as the part of the building containing the asbestos was in good condition and not in need of repair. However, it is accepted that these expenses were in relation to environmental protection activities and they are therefore deductible under section 40-755 of the ITAA 1997.

Detailed reasoning

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. 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.

However 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) 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 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.

TR 97/23 provides an example of expenditure that is not deductible as a repair, being the cost of removing asbestos insulation from factory walls (if the insulation is not in need of repair) and replacing it with modern insulation material. This work does not constitute the rectification of a defect in a mechanical or physical sense as envisaged by section 25-10. The asbestos insulation functions efficiently as insulation. It is being replaced because of the health risk it might pose to factory occupants, not to 'repair' the factory in the ordinary sense of the word. Such costs were found to be deductible as environmental protection activities.

In your case, you engaged the services of a relevant expert to assess your property for asbestos contamination. Following their advice you had all the contaminated dust removed from the property and you sealed the part of the building that was the source of the asbestos with paint over the entire surface area. Following the works your property was again assessed by the expert.

The part of the building that was attributed as being the cause of the asbestos contamination was otherwise in good condition; except for the potential asbestos contamination it would not require repair. Your circumstances are similar to the example provided in TR 97/23 in that the work does not constitute the rectification of a defect in a mechanical or physical sense as envisaged by section 25-10 of the ITAA 1997.

In your case, the sealing of part of the building that is used to produce assessable income constitutes an eligible environmental protection activity as it remedies an environmental pollutant. This work was undertaken with the sole or dominant purpose of preventing pollution of the site of your income earning activities. You also incurred expenses to have your property assessed by a relevant expert and to have the asbestos contaminated dust removed by a professional. Therefore you are entitled to a deduction under section 40-755 of the ITAA 1997 for the expenses incurred in engaging an expert and an asbestos removal contractor.