ATO Interpretative Decision

ATO ID 2004/44

Income Tax

Capital Allowances: environmental protection activities - septic tank system
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

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 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.

Date of decision: 11 December 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 40-755
   subsection 40-755(1)
   subsection 40-755(2)
   section 40-760
   paragraph 40-760(1)(b)
   Division 43

Income Tax Assessment Act 1936
section 82BK

Case References:
Case F51 / Case 88
(1955) 6 TBRD 300
(1955) 5 CTBR (NS) 522

Related ATO Interpretative Decisions
ATO ID 2002/706
ATO ID 2003/17

Other References:
Explanatory Memorandum to the Taxation Laws Amendment Act (No. 5) 1992

Keywords
Environmental protection activities
Environmental protection expenses
Structural improvements

Business Line: Private Groups and High Wealth Individuals

Date of publication: 16 January 2004

ISSN: 1445-2782

history

	Date:	Version:
You are here	11 December 2003	Original statement
	20 February 2018	Updated statement
	17 April 2019	Archived

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