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Edited version of private advice
Authorisation Number: 1051522721130
Date of advice: 9 December 2019
Ruling
Subject: Environmental protection activities - specified building materials
Question
Are you eligible to claim a deduction for the expenses incurred for the removal of the specified building materials from your rental property and replacing it with new compliant building materials under section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commenced on:
1 July 2018
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You have owned a rental property, a unit, for a number of years.
A building notice was served by a government authority providing options for the removal of certain building materials (the specified building materials) or the continued use of them only if other requirements are met. The notice was not responded to by the due date.
Accordingly, a building order was issued ordering that you remove the specified building materials and replace them with complying building materials.
The works are not covered by insurance or builder's warranty.
The new material will have the same form and appearance as the replaced material and will not provide any increased efficiency or function.
The building owner's corporation is coordinating the rectification project. There are insufficient funds available in the sinking fund so the owners of each unit will have to pay the costs associated with the works.
All work will be carried out by qualified professionals.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 40-755
Reasons for decision
Under section 40-755 ITAA 1997, a deduction can be claimed for expenses incurred for the sole or dominant purpose of carrying on environmental protection activities. 'Environmental protection activities' include the cleaning up or removal of waste or pollution that is on or from the site of your earning activity. The concluding line to subsection 40-755(2) ITAA 1997 makes it clear that the definition is intended to be restrictive and that nothing outside of that definition can be an environmental protection activity. Paragraph 40-760(1)(c) excludes deductions for alterations or improvements to a building.
While immediate deductions cannot be claimed for alterations or improvements to a building, this 'exclusion does not apply where the replacement of a pollutant material with a non-pollutant material results in a minor or incidental degree of alteration or improvement'.
According to paragraph 6 of Taxation Ruling TR 2019/D3 Income tax: deductions for expenditure on environmental protection activities, pollution is contamination by the direct or indirect introduction of substances (physical or gaseous), noise (for example, vibrations) or energy (for example, radiation) which have harmful or poisonous effects on the environment. This definition of pollution should not 'extend beyond its ordinary meaning'.
The specified building material does not satisfy this definition of pollution. As a result, the removal of the material is not an environmental protection activity and its cost is not a deductible expense under section 40-755 of the ITAA 1997.