Commercial and residential rental property owners may be able to claim a deduction for expenditure on environmental protection activities e.g. the removal of asbestos.
The ATO’s Draft Taxation Ruling TR 2019/D3 indicates that the testing and removal of asbestos material could be deductible.
An interesting inclusion in this ruling is that consistent with existing law you cannot claim an environmental protection deduction for capital expenditure incurred in constructing a building, structure or structural improvement (e.g. Example 5 below). 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. Example 6 below shows the asbestos-reinforced cement sheeting roof was replaced with an alloy-coated metal roofing of superior quality, and therefore the cost of the replacement roof was a capital improvement and not deductible.
Example 2 from the draft ruling covers the demolition of a shed containing asbestos on a residential rental property:
Angela owns a residential property from which she derives rental income. The property consisted of a house and dilapidated shed in the backyard. Angela sought advice from a building contractor to determine whether the shed should be renovated or removed.
She was advised to remove the entire shed because it was clad with asbestos cement sheeting which was damaged and releasing asbestos fibres into the air. This could be potentially harmful to Angela's tenants. Angela contracted an asbestos removal company to safely demolish and remove the shed at a cost of $7,000.
The demolition and removal of the shed is a capital expense that cannot be claimed under any other income tax provision.
The demolition and removal of the shed is an 'environmental protection activity' as it was undertaken for the purpose of preventing asbestos pollution. The incidental result of visually improving the backyard by removing the dilapidated shed does not change the primary purpose of the activity, being the prevention of pollution to ensure the safety of Angela's tenants.
Therefore, the cost of demolishing and removing the shed is expenditure incurred for the dominant purpose of preventing pollution from the site of Angela's rental income producing activity. Accordingly, Angela can deduct $7,000 under section 40-755.
Example 5 from the draft ruling covers the limit on deductions where there is a single outlay for multiple activities:
Andrew owns and operates a petrol station and a number of fuel storage tanks are located on the property. One of the fuel tanks begins to leak and contaminates the soil with petrol. Andrew hires John for the following activities:
removal of the concrete covering the leaking tank
clearing the soil contaminated by the leaking tank
removal of the leaking tank
installation of a new tank including plumbing work.
John provides an itemised invoice to Andrew. Andrew pays a total of $20,000 comprised of:
$12,000 for the removal of the fuel tank, concrete covering and clearing the contaminated soil, and
$8,000 for the installation of the new tank.
The removal of the fuel tank and its concrete covering, and clearing the contaminated soil, constitutes environmental protection activities (that is, cleaning up and removing waste from the site of Andrew's earning activity). Andrew can deduct $12,000 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. It represents capital expenditure for constructing a structure or structural improvement and is expressly excluded from the scope of these provisions.
Example 6 from the draft ruling covers the limit on deductions when replacing pollutant materials in buildings:
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.
The asbestos-reinforced cement sheeting is in good condition, but Craig wishes to remove it. Craig engaged a building contractor to remove the original roof and replace it with alloy-coated metal roofing of superior quality.
The scope of the environmental protection activities will include all deeds or actions which are necessary to remedy the asbestos pollution. This will involve the removal of the asbestos roof but not its replacement.
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.
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.
The replacement roof is a capital improvement which is deductible over time under Division 43. Therefore, the $11,000 cost of the replacement roof is not deductible under section 40-755 since it is a capital improvement excluded under section 40-760.
The ruling doesn’t deal with business owners who use their residence as a place of business, however they may be also able to access these deductions.
If you would like to discuss this matter further with respect to your personal situation, please contact our office on 07 3862 2003.