Edited version of your private ruling

Authorisation Number: 1012522124716

Ruling

Subject: Environmental testing expenses

Question

Are you entitled to claim a deduction for the cost of various tests required under the environmental laws when selling a property which was formerly used in your income-producing activities?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You and your spouse operated a business on the property you owned.

You ceased your business activities on the property during the relevant financial year.

You wish to sell the property. Under the government's environmental laws you have been required to obtain various environmental reports.

You have not undertaken any remedial work to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-755

Reasons for decision

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.

Expense as a business expense

Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable for the balance of the loan.

In this situation, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided.

Whilst TR 2004/4 specifically discusses interest on a loan used in an income-producing activity, the principle can be used in relation to other business expenses. That is, if an expense is incurred after a business has ceased and a nexus exists between the expense and the normal income producing activities of the former business then the expense will be deductible.

In your case, you and your spouse operated a business. It is considered that environmental testing is not a normal part of this type of business.

Whilst it is recognised that the expenses related to the land on which the business was operated, there is an insufficient nexus between the expenses and how this types of business produces its assessable income.

No deduction is allowable under section 8-1 of the ITAA 1997 for the cost of environmental testing as a business expense.

Expense as an environmental protection expense

Section 40-755 of the ITAA 1997 allows you to claim deductions for expenses that were incurred with the sole or dominant purpose of environmental protection activities. Section 40-755 of the ITAA 1997 is a rewrite of former subsection 82BM(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

The Explanatory Memorandum to the Taxation Laws Amendment Act (No. 5) 1992 (the EM) which introduced former subsection 82BM(2) of the ITAA 1936, provides guidance in the interpretation of section 40-755 of the ITAA 1997. The EM states:

Expenditure will only be for the sole or dominant purpose of carrying on an eligible environment activity if it is primarily directed to that environment protection activity. A deduction will not be available if the protection of the environment is only a residual or subsidiary purpose of the taxpayer.

In your case, you have undertaken various environmental tests on your property as it is a requirement under environmental laws when selling a property.

It is considered that you have undertaken the testing on the property for the dominant purpose of selling the property. Any environmental protection activities are a subsidiary purpose and not the dominant purpose of incurring the expense.

No deduction is allowable under section 40-755 of the ITAA 1997 for the cost of testing as the dominant purpose of the testing is related to the sale of the property.