1 Are you entitled to a deduction under section 40-755 of Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in the removal of asbestos from the garage of your rental property, including the following: • Contain remove and dispose of the asbestos material in respect of an existing garage; and • Locate contain and remove the asbestos in the existing concrete slab of the garage; and the • Removal of contaminated asbestos debris in the existing lawn/soil and replacing it with new topsoil and turf • Demolition of the old asbestos affected garage
1 Yes. The property was purchased with the intention of being a rental property however for it to be rented out you needed to remove the asbestos from the affected area. Once the asbestos was removed the property was rented out and assessable income was earned. The Commissioner accepts that you incurred the asbestos removal costs for the purpose of carrying on environmental protection activities as per Taxation Ruling TR 2020/2 Income tax: deductions for expenditure on environmental protection activities. Question 2 Are you entitled to a deduction under section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred to rebuild the garage of your rental property, including the following: • The laying of a new concrete slab and the rebuild of the garage using Colourbond material. Answer 2 No. The rebuild of the garageis a capital improvement and is therefore not deductible under section 40-755 of the ITAA 1997 as it is a capital improvement excluded under section 40-760. This ruling applies for the following period: Year ended 30 June 20XX. The scheme commenced on: 1 July 20XX.
At the time of inspecting the property with the real estate agent you were advised that the garage was constructed of asbestos material. After inspecting the property, you got a Building and Timber Pest Inspection done which reported that the garage had a number of defects one of which was damaged and corroded asbestos sheeting. Soon after the Building and Timber Pest Inspection you entered a contract to purchase the property with the sole intention of renting out the property to tenants and earning assessable income. After settlement occurred on the property further investigation from a licenced builder confirmed that the garage was constructed of asbestos material which was cracked in various places. It was recommended that the entire garage be demolished and replaced. The licenced builder engaged Company ABC to complete the asbestos waste removal. The costs are as follows: • Contain, remove and dispose of the asbestos material in respect of the existing garage and existing slab $XX,XXX. • Remove contaminated asbestos debris in the existing lawn/soil and replace with new topsoil and turf $XX,XXX; and • Demolish and rebuild new Colourbond garage $XX,XXX.
The property was leased to tenants in the year the asbestos removal was done.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 25-10 Income Tax Assessment Act 1997 section 40-760 Income Tax Assessment Act 1997 section 40-775
Summary Section 40-755 of the ITAA 1997 only applies to expenditure incurred for the sole or dominant purpose of carrying on environmental protection activities which includes the removal of the asbestos. As substantial work in being undertaken beyond the removal of asbestos, section 40-760 of the ITAA 1997 will apply, limiting the operation of section 40-755 of the ITAA 1997 to only the removal of asbestos and demolition of the garage. The expenses incurred to rebuild the garage is not a deductible expense. It is a capital improvement which is deductible over time under Division 43 of the ITAA 1997. Detailed reasoning Environmental Protection Activities Legislation Section 40-755 of the ITAA 1997 allows deductions for environmental protection activities. 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. Subsection 40-755(2) of the ITAA 1997 defines what constitutes environmental protection activities and states: Environmental protection activities are any of the following activities that are carried on by or for you:
(a) preventing, fighting or remedying: (i) pollution resulting, or likely to result, from *your earning activity; or (ii) pollution of or from the site of your earning activity; or (iii) pollution of or from a site where an entity was carrying on any *business that you have acquired and carry on substantially unchanged as your earning activity; (b) treating, cleaning up, removing or storing: (i) waste resulting, or likely to result, from your earning activity; or (ii) waste that is on or from the site of *your earning activity; or (iii) waste that is on or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity. No other activities are environmental protection activities. Subsection 40-755(3) of the ITAA 1997 defines what constitutes your earning activity and states in part: Your earning activity is an activity you carried on, carry on, or propose to carry on: (a) for the *purpose of producing assessable income for an income year (except a *net capital gain);...
Section 40-760 of the ITAA limits deductions from environmental protection activities. Paragraph 40-760(1)(c) of the ITAA 1997 denies a deduction for expenditure that is 'capital expenditure for constructing an extension, alteration or improvement to a building, structure or structural improvement'. In addition, subsection 40-760(2) of the ITAA 1997 states: In particular, you cannot deduct under section 40-755 expenditure to the extent that you incur it on carrying out an activity for environmental impact assessment of your project. Therefore, for section 40-755 of the ITAA 1997 to apply: • the expenditure must be in respect of environmental protection activities • the environmental protection activities must be connected to the entity's earning activity • the sole or dominant purpose is the carrying on of those environmental protection activities; and • section 40-760 of the ITAA 1997 does not deny the deduction. Environmental protection activities At paragraph 3 of TR 2020/2 Income tax: deductions for expenditure on environmental protection activities , 'environmental protection activities' are defined as activities carried on by or for you:
• to prevent, fight or remedy pollution o resulting, or likely to result, from your earning activity o of or from the site of your earning activity o of or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity, and • to treat, clean up, remove or store waste o resulting, or likely to result, from your earning activity o on or from the site of your earning activity o on or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity. Paragraph 4 states that the term 'activities' is not defined and takes its ordinary, natural meaning of 'specific deeds or actions'. Paragraph 12 also states that:
Such activities may include identifying and testing for actual or likely pollution. Where there may be actual or likely pollution (for example, asbestos is suspected), and testing is required to identify the existence and/or extent of the actual or likely pollution, the testing activity is considered to be integral to the undertaking of the environmental protection activity, even if pollution is not found. Environmental protection activities must be connected to the entity's earning activity To establish the necessary connection betweenpollution or waste and 'your earning activity', the pollution must be of be of or from the site of your earning activity (paragraph 19 of TR 2020/2). In this case, the asbestos removal work is being done is on the garage of the property. For the property to be rented out the asbestos needed to be removed. When the asbestos was removed and the works were completed, the property was rented out and continued to be rented out for the remained of the income year. Therefore, the site will be used as for income producing activity, as required by s 40-755(3). Sole or dominant purpose is the carrying on of those environmental protection activities
Paragraph 32 of TR 2020/2 states that to claim a deduction, you must have incurred expenditure for the 'sole or dominant purpose of carrying on environmental protection activities.' You received a Building and Timber Pest Inspection Report done which observed broken cement sheeting on the garage which may be asbestos. Further investigation from a licenced builder confirmed that the garage was constructed of asbestos material which was cracked and various places. There were also traces of asbestos in the existing cracked/damaged concrete slab on which the garage was built as well as asbestos debris in the existing lawn/soil surrounding the garage. It was recommended that the entire garage be demolished and replaced. It is accepted that the dominant purpose of undertaking the works on the garage is the removal and replacement of the asbestos. Section 40-760 of the ITAA 1997 In undertaking the work on the garage there are two main phases, the removal of the asbestos affected areas which includes demolishing the garage and removal of the concrete slab, followed by the reconstruction or rebuild of the garage consisting of a new concrete slab and Colourbond sheeting and roof.
If this reconstruction results in an extension, alteration, or improvement to any of the building then section 40-760 of the ITAA 1997 will deny a deduction under section 40-755 of the ITAA 1997 for that reconstruction. Paragraph 32 of TR 2020/2 states that you cannot deduct an amount under section 40-755 of the ITAA 1997 for capital expenditure for constructing a building, structure or structural improvement (including an extension, alteration or improvement to any of these), due to the operation of section 40-760 of the ITAA 1997. This is unless 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 (paragraph 43 of TR 2020/2). Minor or incidental degree In Example 7 of TR 2020/2, Andrew pays $12,000 for the removal of the fuel tank, concrete covering and clearing of the contaminated soil and $8,000 for the installation of the new tank.
The removal of the fuel tank, its concrete covering, and the clearance of the contaminated soil, constitutes environmental protection activities and can be deducted under section 40-755 since this is expenditure which can be identified and is specifically allocable to environmental protection activities and therefore satisfies the sole or dominant purpose test. However, the remaining $8,000 is not deductible under section 40-755 as it represents capital expenditure for constructing a structure or structural improvement and is expressly excluded under section 40-760 from the scope of these provisions. This is similar to your case as the rebuild of the garage does not involve a minor or incidental degree of improvement. It is a capital improvement and not deductible under section 40-755 of the ITAA 1997.