Edited version of private advice

Authorisation Number: 1052250341841

Date of advice: 13 June 2024

Ruling

Subject: Deductions - repairs and asbestos removal

Question 1

Is the expenditure incurred by the Trust in replacing the asbestos affected part of the roof after removing the asbestos deductible as a repair pursuant to section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the expenditure incurred by the Trust in removing asbestos sheeting from the roof deductible to the Trust pursuant to section 40-755 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background and History

1.    There are no special significant improvements to or features included in the property and the property is located on a corner block.

2.    The property is wholly owned by the corporate trustee of the Trust.

3.    The property was purchased in 20XX for $XXXX and is used for rental purposes.

4.    The property has been rented since purchase, except for a 6 month period in 20XX.

5.    The expenditure was incurred in the income year ending 30 June 20XX by the Trust.

6.    The property is not managed by an agent.

7.    The tenant is unrelated to the Trust and is a retailer/wholesaler.

8.    The property is leased for a market rent.

9.    There has been no private use of the property.

10.  The property has not been occupied rent-free at any time. Rent was reduced by 50% for 6 months during the Covid-19 pandemic.

11.  The land area is XXXXm².

12.  The area of the roof replaced was XXXXm².

13.  The total roof area of the property is XXXXm².

14.  The Trust suspected asbestos was present in the property. After purchasing the property, the Trust commissioned an asbestos report to determine that the property was safe to rent. The consultant's report determined that asbestos was present in the property but safe to rent.

15.  The property has an approximate market value of $XXXX.

16.  The Trust sought an increase for insurance purposes in the replacement value of the property. The insurer, asked for details of the materials used in the construction of the property when assessing the request for the increase in the insured value. The insurer considered the asbestos sheeting harmful. The property insurance was not available if the asbestos sheeting was not removed from the roof. A copy of the email exchange between the insurance agent for the Trust and the insurer has been sighted.

Work Undertaken

17.  The roof itself consisted of corrugated Super Six asbestos sheeting.

18.  The asbestos was part of the material of the roof sheeting.

19.  The replacement material was Colorbond corrugated steel sheeting.

20.  Colorbond corrugated steel sheeting was the cheapest material to use, as being lightweight it did not require any change to the supporting structure of the roof and no council approvals were required.

21.  Colorbond is a non-pollutant.

22.  The asbestos sheeting had not reached the end of its recommended useful life.

23.  The asbestos sheeting was in good condition at time of removal and there were no other concerns about the condition.

24.  The roofing contractor did not report any other form of degradation or deterioration upon removal.

25.  There was no other professional assessment undertaken of the condition of the asbestos sheeting prior to its removal.

26.  The insulation underneath the asbestos roof sheeting was also removed to rule out any possibility of any asbestos contamination remaining in the insulation.

27.  The removed insulation consisted of some woolly fibre and some foil sheeting.

28.  Foil sheeting with attached non-toxic fibre was used as the replacement insulation material.

29.  No insurance claims were made, and no insurance or other recoveries were received.

30.  A copy of the invoices from the roofing contractor for the replacement of the roof and guttering have been provided.

31.  A copy of the invoice for the removal of asbestos has been provided.

Relevant legislative provisions

Section 25-10 of the Income Tax Assessment Act 1997

Section 40-755 of the Income Tax Assessment Act 1997

Section 40-760 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

The cost of the works undertaken to replace the asbestos affected part of the roofing are not deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

Subsection 25-10(1) of the ITAA 1997 states that you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The relevant paragraphs from TR 97/23 have been extracted as follows:

13. The word 'repairs' has its ordinary meaning. It 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.

14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.

15. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

16. To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety.

Relevantly under paragraph 117 of TR 97/23, the Commissioner accepts, as determined in W Thomas and Co Pty Ltd v. FC of T 155 CLR 58 (W Thomas & Co case), the roof of a building is not considered an entirety:

In the W Thomas & Co case, where the High Court considered deductions claimed for repairs to guttering, the roof, walls and two floors of a building, the view was taken that the whole building was the entirety. Windeyer J said (at 155 CLR 66; 14 ATD 83) that the relevant question is not:

' ... whether the roof or the floor or some other part of the building, looked at by itself, was repaired as distinct from being reconstructed or replaced. It is whether what was done to the roof or the floor or some other part was a repair of the building.'

According to paragraph 19 of TR 97/23, work done partly to remedy or make good defects, damage or deterioration does not cease to be a repair if it is also done partly - even largely - to prevent or anticipate defects, damage or deterioration in property or in rectifying defects in their very early stages. Repairs are not confined to rectifying defects, damage or deterioration that have already become serious. Work done to property not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10 of the ITAA 1997.

Paragraphs 26 and 27 of TR 97/23 relevantly state:

26. Work done to property in controlling health risks associated with the use of dangerous substances (such as asbestos, chlorofluorocarbons ('CFCs'), chromium, dioxin, cyanide, pesticides and arsenic) does not qualify as a 'repair' for the purposes of section 25-10 unless the work remedies or makes good defects in, damage to, or deterioration (in a mechanical or physical sense) of, the property.

27. An example of expenditure that is not deductible as a repair is 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.

Application to your circumstances

In this case, there was no damage to or deterioration of the asbestos affected roofing material. The replacement of the asbestos affected roof is not considered a repair and therefore the costs incurred to replace the asbestos affected roof are not deductible under section 25-10 of the ITAA 1997.

Question 2

Summary

The amount for the removal of the asbestos is deductible under 40-755 of the ITAA 1997.

Detailed reasoning

Section 40-755 of the ITAA 1997 allows deductions for environmental protection activities and subsection 40-755(1) of the ITAA 1997 states you can deduct expenditure you incur in an income year for the sole or dominant purpose of carrying on 'environmental protection activities'.

Environmental protection activities is defined in subsection 40-755(2) of the ITAA 1997 to mean activities carried on by you or for you to prevent, fight or remedy pollution:

• resulting, or likely to result, from your earning activity;
• of or from the site of your earning activity; or
• of or from a site where an entity was carrying on a business that you have acquired and carry on substantially unchanged as your earning activity.

Environmental protection activities must be 'carried on by or for you'. An activity is 'carried on by or for you' if it is carried on directly by you or your agent or performed by another to your benefit or in place of you.

The term 'pollution' is not defined and takes its ordinary meaning, namely contamination by a harmful or potentially dangerous substance which is detrimental to living things, such as explosive chemicals, greenhouse gases and includes noise pollution. Asbestos is considered a pollutant in this context.

Where your earning activity is the leasing of a site, the granting of rights to use a site or a similar activity in respect of a site, that site is the site of your earning activity.

Where pollutant material, such as asbestos has been used in the construction of a building and action is taken to remove and replace this material, you may only claim an environment protection deduction to the extent that it is not deductible under another provision outside Subdivision 40-H of the ITAA 1997. The deduction for environmental protection activities is a provision of last resort.

Example 8 of Taxation Ruling TR 2020/2 Income tax: deductions for expenditure on environmental protection activities (TR 2020/2) is broadly similar to your circumstances and relevantly provides:

Example 8 - limit on deductions: replacing pollutant materials in buildings

83. Craig owns a commercial rental property from which he derives rental income. The roof of the property was clad with asbestos-reinforced cement sheeting, which is a pollutant material.

84. The asbestos-reinforced cement sheeting was in good condition, but Craig wished to remove it due to the presence of asbestos and the reasonably likely harmful consequence of any asbestos disturbance. Craig engaged a building contractor to remove the original roof and replace it with roofing material of a superior quality.

85. The scope of the environmental protection activities will include all deeds or actions which are necessary to prevent asbestos pollution. This will involve the removal of the asbestos roof but not its replacement.

86. The total cost of the work was quoted by the building contractor as $20,000. Craig's contractor advised that $9,000 of this total cost would be for a specialist subcontractor to undertake the asbestos roof removal.

87. Craig can deduct $9,000 under section 40-755 since this is expenditure which can be identified and specifically allocated to an environmental protection activity (that is, remedying pollution from the site of Craig's earning activity) and therefore satisfies the sole or dominant purpose test.

88. ............

Application to your circumstances

In your circumstances, the removal of the asbestos is in respect of environmental protection activities and meets all the other tests under section 40-755 of the ITAA 1997. The removal of the asbestos is connected with your derivation of rental income and the removal of the asbestos will have little impact on the tenancy. The intended work is only for the removal of the asbestos. Therefore it is accepted that the sole or dominant purpose of undertaking the repairs is the removal of asbestos and the amount incurred for asbestos removal is deductible under section 40-755 of the ITAA 1997.