Edited version of your written advice

Authorisation Number: 1012802311360

Ruling

Subject: Rental property expenses

Question

Is a deduction allowable for the cost of repairing the leaking asbestos roof of your rental property, and replacing the remainder of the roof and the guttering, eaves, ceilings and walls which also contain asbestos?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You purchased a rental property some years ago. The property has always been an income producing property. The roof and other items were in good condition when the property was purchased.

Recently the roof has been leaking which has caused significant issues with mould. Your property manager has requested that the roof be repaired to prevent this, however as the roof is asbestos it must be replaced. It has also been determined that the guttering, eaves, ceilings and walls, although in reasonable condition, also contain asbestos and must be replaced.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-755

Reasons for decision

Asbestos materials

Work undertaken to an investment property in controlling health risks associated with the use of dangerous substances (such as asbestos) does not qualify as a 'repair' for the purposes of section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) unless the work remedies or makes good defects in, damage to, or deterioration (in a mechanical or physical sense), of the property. The environmental protection provisions are provisions of last resort. If a deduction for environmental protection activities 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, you purchased a rental property some years ago. The roof of the rental property was in good condition when you purchased the property but has deteriorated over time, and has been leaking which has caused significant issues with mould. It was determined when these leaks were being repaired that as well as the roof itself, the guttering, eaves, ceilings and walls also contain asbestos and must be removed. These other items are all in reasonable condition.

Replacement of damaged roof areas

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.

Taxation Ruling TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

• the extent of the work carried out represents a renewal or reconstruction of the entirety, or

• the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or

• the work is an initial repair.

In your case, the removal and replacement of the damaged areas of the roof is not considered an initial repair or a renewal or reconstruction of the entirety.

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 leaking areas of the roof constitutes a repair as the change in materials of the roof did not improve the efficiency or function. The work undertaken to leaking 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 leaking areas of the roof.

Replacement of undamaged roof area and other items

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. Environmental protection activities are listed in subsection 40-755(2) of the ITAA 1997.

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.

In your case, the replacement of the undamaged part of the roof, and the guttering, eaves, ceilings and walls, does not constitute a repair as there was no existing defects, damage or deterioration to these items. 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. Accordingly, we need to consider whether you are entitled to a deduction for environmental protection activities carried out to your rental property. 

The removing and replacing the undamaged part of the roof and the other items of a rental property that is used to produce assessable income constitutes an eligible environmental protection activity as it remedies an environmental pollutant. It is considered that your sole or dominant purpose in replacing the undamaged area of the roof and other items was as a result of environmental protection activities to your rental property. Also this work is not considered to be an extension, alteration or improvement to the building as it is merely, replacing the undamaged parts of the roof with its modern equivalent.

Accordingly, you were carrying on environmental protection activities when the undamaged part of the asbestos roof and the other items containing asbestos were removed with the sole or dominant purpose of preventing pollution of the site of your earning activities by asbestos.

Therefore, you are entitled to a deduction for the cost of replacing the undamaged part of the roof and the guttering, eaves, ceilings and walls of your rental property under section 40-755 of the ITAA 1997.