One of the biggest problems facing investors with properties of “a certain age” is that many of the materials used in the construction of the property won’t pass muster with contemporary health and safety regulations. Indeed, many such materials are downright dangerous.
For properties built between the 1940s and 1980s, asbestos is a particular problem. It was commonly used in walls, drains, flues, roofing and guttering. Whilst usually safe if not disturbed, if asbestos materials are damaged and fibres are freed, they pose a health risk. This is a particular problem if you want to renovate your property since doing so will likely lead to a need to remove any affected asbestos.
The good news however, is that you can claim a tax deduction for the cost of the testing and removal of asbestos from your rental or commercial property.
The ATO has recently issued a tax ruling (TR 2019/D3) that states that if you have undertaken testing for asbestos (even if none was found), removed asbestos and/or reinstated property parts (for example, walls) that were removed due to asbestos, you may be able to claim a tax deduction for these costs.
This applies to rental or commercial properties, or your home if it is also a place of business.
Amongst the things you can claim for are:
- Asbestos testing / environmental testing of a building you own (even if asbestos is not ultimately found), providing the building is a rental or commercial property. If asbestos is suspected in the building and testing is required, the testing activity is considered to be integral to the undertaking of the environmental protection activity, even if asbestos is not found.
- Asbestos removal by a licenced removalist.
- Reinstatement of a part of the property after asbestos is removed.
An example is the replacement costs of an asbestos-containing wall, to return the wall to its ‘former state’.
Where you undertake the asbestos testing/removal as part of a broader renovation project, the element that relates to the asbestos testing/removal will be immediately deductible if it can be separately identified as part of the overall cost (for instance, you receive a separate invoice from the asbestos removalist).
Unfortunately, where the asbestos testing/removal is not a separately identifiable cost (for instance, where one building firm looks after the asbestos and also undertakes broader renovation work, and invoices the whole lot as one lump sum), the ATO will not allow a deduction for the asbestos element unless the asbestos work is the dominant part of the work undertaken.
What that means for property investors looking to renovate their investment property is that they should ensure that, where one building firm is doing the work, they receive a separately itemised bill listing all the different elements of the job, with the asbestos work clearly identified.
The following examples form the tax ruling highlight how the rules work in practice:
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 could not normally be claimed under any other income tax provision.
However, 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.
Craig owns a 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 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 as an environmental protection activity since it is a capital improvement.