The Australian Taxation Office (ATO) has finalised its ruling on the rules that deny a deduction for travel expenditure incurred by investors in residential property.
Travel expenses incurred in collecting rent and in connection with the maintenance and repair of a residential rental property held as an investment or to visit a property manager are not deductible from 1 July 2017 under s 26-31 of the Income Tax Assessment Act (ITAA) 1997. One of the exceptions to this rule allows the deduction where a taxpayer incurs the expense in the course of carrying on a business.
Law Companion Ruling (LCR) 2018/7 clarifies the Commissioner’s view on the meaning of the term “residential premises”, the meaning of “carrying on a business”for the purpose of s 26-31 and how to deal with expenses that are incurred for multiple purposes, where an apportionment may be appropriate.
Residential Premises
Section 26-31 of the ITAA 1997 refers to the “use of residential premises as residential accommodation”. The expression “residential premises” takes its meaning from the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), which defines it as land or a building that is occupied, or is intended to be and is capable of being occupied, as a residence or for residential accommodation. The ATO’s view on what constitutes “residential premises”for GST purposes are set in in GST Ruling GSTR 2012/5.
Carrying on a Business of Property Investing
A deduction is not denied under s 26-31 for travel expenditure necessarily incurred in carrying on a business. This exclusion covers taxpayers carrying on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. The ATO make take the following matters into account when determining whether a business of letting residential properties is being carried out:
It is generally harder for individuals to demonstrate that they are carrying on a business of property investing than it is for companies. In the ATO’s view, “the receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.
Travel Expenses Incurred for Multiple Purposes
The ATO accepts that a fair and reasonable apportionment is required where a travel expenditure or outgoing is incurred both to generate the rental income from the residential property and some other income. Possible bases of apportionment include floor-area ratio, rental income and travel time spent attending to the various purposes. The example in the ruling is of expenditure incurred in travelling to a property that is partly rented out as a residence and partly used a business premises.
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