Edited version of private advice

Authorisation Number: 1052303522283

Date of advice: 30 September 2024

Ruling

Subject: Rental property expenses - asbestos remediation

Question 1

Are the expenses you incurred in undertaking the asbestos contamination remediation in Table 1 allowable deductions undersection 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the expenses you incurred in relation to the property in Table 2 allowable deductions undersection 8-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Period ended 30 June XXX

The scheme commenced on:

1 July XXX

Relevant facts and circumstances

In XXX, you bought the property at XXX and moved into the property in XXX.

On XXX, storm water leaked into the bathroom via the asbestos roof.

You lived in the property for approximately 6 months and moved out on XXX with the intention of renting the property. You signed a contract with XXX estate agency to rent out the property on XXX.

On XXX, you signed a contract with XXX to rent a property to live in at XXX.

On XXX, you had some property maintenance done (roof cleaning, painting, and leakage services) by XXX who you believed to be licensed.

On XXX, during the maintenance process, asbestos was exposed and identified by the neighbour who notified council.

A report requested by the Council noted that the asbestos garage roof was significantly weathered, and the high-pressure cleaning had eroded the surface layer and released asbestos fibres in a cement 'slurry' which was visibly evident at the property including:

•         Gutter and downpipes

•         External wall cladding

•         Windows and flyscreens

•         Ground, vegetation, concrete and pavement surfaces

•         Boundary fences.

On XXX, the local council issued a 'Direction to Take Preventative Action' letter which stated you must complete all recommended remediation works by XXX. This date was subsequently extended several times.

The contractor from XXX advised you their license was valid until XXX and on the following day they advised they made a mistake and were not correctly licenced, though still wanted payment for works completed.

On XXX, you lodged a complaint with Fair Trading.

In around XXX, you obtained a quote for XXX for asbestos remediation as per the council's requirements.

On XXX started rectification works, however, due to contractual issues, the work was not completed.

You obtained legal advice and pursued XXX through legal avenues as they did not complete the job.

After various delays over some months, another contractor was engaged to complete the rectification which took place in XXX. The council provided another extension until XXX.

The asbestos remediation process involved the removal of various items including X tonnes of vegetation and soil along with gutters, downpipes, doors, curtains, mesh, garage roller door, plus cleaning of the entire premises.

On XXX, you received an Asbestos Clearance Certificate from a contractor stating that a clearance inspection had been performed to verify that asbestos containing materials had been adequately removed from where removal works took place and that the area was safe for normal use.

On XXX, the council informed you that the directions of the prevention notice in relation to the contamination had been complied with.

The property was vacant from the time you moved out on XXX until XXX due to the asbestos contamination and the completion of rectification measures required by council.

The property was rented out from XXX to XXX. The property was vacated for XXX when you intended to move back into the property.

Your insurance assessor declined the claim you made under your home insurance policy.

You incurred the following expenses during the asbestos remediation process:

Table 1: You incurred the following expenses during the asbestos remediation process:

Table 2: Expenses incurred in respect of a property held for income producing purposes during the asbestos remediation process:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 40-755

Income Tax Assessment Act 1997 section 40-760

Reasons for decision

Rental property expenses

Section 8-1 of the ITAA 1997 states that you can deduct for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature.

Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces or enlarges the income producing asset.

Section 25-10 of the ITAA 1997 provides that expenditure incurred for repairs to premises held or used solely for the purpose of producing assessable income are deductible in the year in which the expenditure was incurred. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Generally speaking, section 8-1 of the ITAA 19917 produces the same result as section 25-10 in relation to the deductibility of repair costs. Section 8-1 has its own tests for deductibility. There may be occasions, however, where section 8-1 allows a deduction for repair expenditure that would otherwise not be deductible under section 25-10 of the ITAA 1997.

The meaning of 'repairs' and the circumstances under which repairs are deductible is set out in Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23).

Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered a subsidiary part rather than the entirety.

Paragraph 50 of the TR 97/23 explains if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair.

A deduction is allowable under section 25-10 of the ITAA 1997 for repair expenditure incurred in a year of income after property is first held for income purposes but before income is actually derived from the property, provided the repairs are not initial repairs. For example, a rental property may be vacant but be advertised as being available for rental. Before a tenant occupies the property, storm damage or an accidental breakage occurs. Expenditure incurred to repair the damage or breakage is deductible under section 25-10 because the property is held for income purposes.

In appropriate circumstances, expenditure for repairs can qualify as a deduction even though the property has previously been held by the taxpayer for non-income purposes. This situation is different from an initial repair done to newly purchased or newly leased property, where the repair expenditure is capital expenditure.

Environmental protection activity expenses

Section 40-755 of theITAA 1997 allows a deduction for expenditure, which can be identified and specifically allocated to an environmental protection activity, that is, remedying pollution from the site of the earning activity. However, section 40-760 states that you cannot deduct an amount under section 40-755 for expenditure to the extent that you can deduct an amount for it under another provision of the Act outside that Subdivision.

Environmental protection activities relate specifically to 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.

TR 2020/2 Income tax: Deductions for expenditure on environmental protection activities states that you cannot claim an environmental protection deduction for capital expenditure incurred in constructing a building, structure, or structural improvement, however, the exclusion does not apply where the replacement of a pollutant material with a non-pollutant material results in a minor or incidental degree of improvement to a building or structure.

Question 1 - Analysis

In your case, the asbestos roof from your proposed rental property was potentially harmful to the surrounding neighbourhood and environment. Your situation constitutes an eligible environmental protection activity as it remedies an environmental pollutant. The contaminated areas were removed, disposed of and cleaned with the sole or dominant purpose of preventing pollution of the site of your proposed income earning activities.

Therefore, you are entitled to a deduction under section 40-755 of the ITAA 1997 for the items listed in Table 1 as asbestos related expenses incurred in relation to your rental property.

Question 2 - Analysis

In your case, it is accepted that your property was held by you for income producing purposes prior to the initial work on the roof being carried out.

It is not clear if all the electrical work carried out was specifically related to environmental activities or constituted repairs to the property; however, it is considered that these expenses were not of a capital nature. Therefore, the expanses are allowable deductions under section 8-1 of the ITAA 1997.

Further, it is considered that the compensation payment to your neighbour and the legal expenses did not relate to an advantage that was an enduring benefit and did not enhance the value of the property. Therefore, they are not capital in nature.

The expenses in Table 2 were incurred in respect of a property held for income producing purposes and are deductible under section 8-1 of the ITAA 1997.

Deductions for expenses should be in proportion to your ownership interest in the property.