Edited version of private advice

Authorisation number: 1052303523517

Date of advice: 18 September 2024

Ruling

Subject: Deductions

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question

Is the cost of removing and replacing an asbestos roof and rainwater goods on the leased commercial property deductible as a repair under section 25-10 of the Income Tax Assessment Act 1997?

Answer

Yes.

The cost of removing the corrugated asbestos roof and replacing it with a Colorbond steel roof on commercial property located at xxx (building) will be an allowable deduction under section 25-10.

Section 25-10 allows a deduction for the cost of repairs to premises used solely for income producing purposes. However, subsection 25-10(3) does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which deductions for repairs are allowable. What is a repair for the purposes of section 25-10 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred, and to the nature and extent of the work done to the property.[1]

It is accepted that the replacement of the corrugated asbestos roof and rainwater goods, including fortification of the original timber roof framing, constitutes a repair as it involved making good of deterioration and damage caused over the years. As such, the expense incurred to remove and replace the roof and rainwater goods will be deductible under section 25-10.

The works are not capital in nature as they do not constitute an improvement or an initial repair.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

Background information

On DD MM YYYY, xxx and xxx (Partners) acquired a commercial property, being the building, as joint tenants.

The Partners formed a partnership (Partnership) to derive rental income from the building.

The building has since been leased to tenants.

At the time of purchase, the building had a hipped corrugated roof clad in asbestos cement sheeting with an asbestos gutter that suffered from falling damp and roof leaks causing damage to walls, windows and doors.

The corrugated roof was installed by the previous owner when the building had major renovations undertaken from YYYY to YYYY.

Soon after acquisition, the Partners upgraded the building in YYYY. However, maintenance could not be undertaken on the roof due to the asbestos present in the material.

The Partners became aware that the building had asbestos upon receipt of a report from a State Heritage Council dated DD MM YYYY.

Due to the building's cultural heritage significance, it was registered in a State Heritage Register on DD MM YYYY.

Conservation works undertaken

Heritage architects, xxx (architect) were engaged on DD MM YYYY to complete conservation works on the building. They concluded that the roof required replacement to address water ingress and to improve the overall safety of the roof cavity, which could not be inspected or repaired due to the asbestos cladding.

The architects provided services from MM YYYY to MM YYYY. They defined a program of works, with 6 works categorised as priority one, including the removal of the original asbestos roof materials and replaced with corrugated Colorbond cladding and rainwater goods.

A contract was entered with the builder, xxx (builder) on DD MM YYYY. Their program of works recommended in removing and replacing the original roof and rainwater goods was undertaken as follows:

Table 1: Program of works

The roof replacement was completed in MM YYYY and MM YYYY. Once the roof sheeting was removed, advice from a structural engineer advised that additional tie-downs were required with timber structural elements to strengthen the original timber roof framing in order to meet current building codes. Bulk insulation and roof sheeting was also installed, followed by Colorbond sheeting and pressings.

The Partners opted for Colorbond as the closest alternative, as it was not possible to replace the old asbestos with the same material.

At the time of the replacement, no evidence was found of falling damp due to failed flashings, but additional flashings and cappings were installed to the parapet roof to prevent future ingress.

Proposed deduction for the repair and replacement of the roof

Where the replacement of the roof is considered to be a deductible repair rather than an improvement, the Partnership is expected to claim a deduction of $xxx as follows:

Table 2: Proposed deduction for repair and replacement of the roof

The Partnership paid the architect and builder's fees from DD MM YYYY to DD MM YYYY.

The architect fees incurred relate to the work and approvals required in removing asbestos and replacement with a Colorbond roof. The Partnership is undecided on whether the architect fees would be included in the deduction and is pending advice from their accountant.

Subsequent works to repair the water damage on internal walls of the building was undertaken in the first half of the YYYY calendar year but these works are excluded from the deduction.

The Partnership received a grant from the XXXXX Council of $xxx to partially fund the replacement of roof cladding and rainwater heads in the YYYY income year. It will be included in the Partnership's assessable income.

The building was continually rented during the roof work and replacement.

The Partnership decided to replace the roof as it had degraded considerably over time and due to concerns with the potential health risks and its effect on the Partnership's ability to continue to derive income from the building.

The Partnership has not made an insurance claim in relation to the original roof and rainwater goods.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

[1] Paragraph 21 of TR 97/23.