Travel deductions for rental properties removed

After 1 July 2017, the deductions for travel to residential rental property will be disallowed. In particular, the travel cost of attending inspections, maintaining the property or collecting rent will be excluded. This includes travel for meetings at the property agent’s office or attending a strata meeting.

It is important to note here that the expenses will relate to travel only. A landlord can still claim a deduction for repairs undertaken to their residential rental property.

The list of non-deductible expenditure relating to travel includes motor vehicle expenses, taxi or hire car costs, airfares, public transport costs and any related meals or accommodation.

 

Excluded entities

In the Exposure Draft to the legislative change, the following entities are excluded from this change, and will continue to be allowed a travel deduction:

  • a corporate tax entity
  • a superannuation plan that is not an SMSF, or
  • a large unit trust (300 or more unit holders).

The legislators have determined that a company is usually an institutional investor of property, and as such is at a lower risk of non-compliance. A company may not be able to make a payment on behalf of a director or an employee for travel, as fringe benefits tax may apply (ie not “otherwise deductible”).

 

Carrying on a business

The changes in the travel deduction from 1 July 2017 will not apply to entities that are “carrying on a business”. Various examples included are property investing, providing retirement living, aged care, student accommodation or property management services.

The deduction will still be available for entities which are carrying on the business of “letting rental properties”. The ATO has provided guidance in various publications as to “how many properties” constitutes carrying on a business. Also, there is Case 1/2014 from the Administrative Appeals Tribunal where the taxpayer was able to argue that they were carrying on a business.

 

 

Dual purpose property

 

The change in legislation will not prevent an investor from claiming a deduction where a property has a dual purpose. Examples of a dual purpose include where the property has another source of income and where the property is both a commercial and a residential premises.

In both instances, each travel expense will need to be scrutinised to determine an appropriate proportion between deductible expenditure and non-deductible expenditure. Such calculations can be determined by the reason for the travel to the property in question.

The indication from the Exposure Draft is that travel relating to repairs or maintenance to common areas of a building will no longer be deductible. For example, the travel of a DIY investor completing some gardening on common property in front of their block of flats will not be allowable. However, if they are carrying on a business or the investor hires a business operator the full expense (including travel) will be deductible.

This change applies to individuals who are “do-it-yourself” property managers. Often times, a DIY investor will need to make running repairs to their property over the ownership period to maintain the value of the rental property. The associated travel expenses are not deductible in these instances. As mentioned above, motor vehicle expenses is listed in the Exposure Draft as being not deductible. There is no mention of whether this provision extends to other vehicles.

 

Construction

It should be noted that where a person is constructing a property as an income-producing asset, the travel expenditure will not be deductible under s 8-1 or as a capital work in Div 43. The only expenditure which may be deductible would be as operating a business of property development, which is outside the scope of this event.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

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