Issue
Is the taxpayer entitled to a deduction under subsection 40-755(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure incurred in the construction of a septic tank system on their rental property?
Decision
No. The taxpayer is not entitled to a deduction under subsection 40-755(1) of the ITAA 1997 for expenditure incurred in the construction of a septic tank system.
Facts
The taxpayer purchased a property with the intention to repair and improve it to a state that it would be suitable for rent.
After all necessary work was done, the property was immediately available for rent.
The necessary work carried out by the taxpayer included the construction of a new septic tank system on the property.
The new septic system processes the effluent to a higher level of purity, before release to the ground pipes for dissipation. The improved system reduces the likelihood of damage to the environment and minimises offensive odours.
Reasons for Decision
Subsection 40-755(1) of the ITAA 1997 provides a deduction for expenditure incurred for the sole or dominant purpose of carrying on environmental protection activities.
'Environmental protection activities' are listed in subsection 40-755(2) of the ITAA 1997. Two classes of those activities are: • preventing, fighting or remedying pollution resulting, or likely to result, from your earning activity; or • treating, cleaning up, removing or storing waste resulting, or likely to result, from your earning activity.
'Your earning activity' is, among other things, an activity you carried on, carry on, or propose to carry on for the purpose of producing your assessable income (except a net capital gain). In defining the site of 'your earning activity', subsection 40-755(4) of the ITAA 1997, includes 'leasing a site you own'.
The term sole or dominant purpose is not defined for the purpose of subsection 40-755(1) of the ITAA 1997. Former section 82BK of the Income Tax Assessment Act 1936 (ITAA 1936) was repealed and ultimately replaced with section 40-755 of the ITAA 1997. The Explanatory Memorandum to the Taxation Laws Amendment Act (No. 5) 1992 (the EM), which introduced former section 82BK of the ITAA 1936, provides guidance in the interpretation of section 40-755 of the ITAA 1997. It stated that: Expenditure will only be for the sole or dominant purpose of carrying on an eligible environment activity if it is primarily directed to that environment protection activity. A deduction will not be available if the protection of the environment is only a residual or subsidiary purpose of the taxpayer.
The EM used the following example to clarify this explanation: ...suppose a taxpayer who operated a dump covers it with soil and plants it with grass and trees at the end of its life. This might have the dual purposes of protecting the environment by preventing noxious substances leaching out and beautifying the site to improve its resale value. If the landscaping is primarily to improve the resale value of the site it will not be deductible as allowable environment protection expenditure.
Where environmental protection expenditure is incurred for two or more purposes (for example protecting the environment as well as improving the resale value of the site), it is necessary to establish the dominant purpose of that expenditure.
The dominant purpose of the taxpayer's construction expenditure is to repair defects in the property so as to upgrade the property to a state that is suitable for rent. The dominant purpose of the taxpayer is not to carry on environmental protection activities.
Further, section 40-760 of the ITAA 1997 provides that you cannot deduct capital expenditure under section 40-755 for construction of a structural improvement (Paragraph 40-760(1)(b)). A septic tank system constructed on a rental property is a structural improvement upon land ((1955) 6 TBRD Case F51 ; (1955) 5 CTBR(NS) Case 88 ).
The taxpayer is not entitled to a deduction under subsection 40-755(1) of the ITAA 1997 for the expenditure incurred on constructing the new septic tank system.
However, that expenditure may be deductible under Division 43 of the ITAA 1997.
Amendment History
Date of Amendment Part Comment 20 February 2018 Reasons for Decision Minor grammatical correction Reasons for Decision Inserted the word "the".
Date of Amendment | Part | Comment
20 February 2018 | Reasons for Decision | Minor grammatical correction
Reasons for Decision | Inserted the word "the".