On 15 November 2017, legislation was passed into law which will see most owners of residential investment properties denied tax deductions for travel expenses related to their properties. This law is backdated to any travel undertaken from 1 July 2017 onward. The legislation is quite wide in scope and covers travel for all purposes including travel for the purpose of inspecting, maintaining, and collecting rent, as well as undertaking repairs and maintenance, and also for seeing your Tax Agent for advice or services in relation to the property. Furthermore, the travel expenses cannot be capitalised either. That is, they cannot be included in any element of the property’s cost base or reduced cost base (and therefore cannot decrease your capital gain or increase your capital loss when you sell the property). Therefore, the travel expenses – such as airfares, accommodation and motor vehicle expenses – are disregarded altogether. Travel expenses affected by the change include airfares, accommodation and motor vehicle costs.
The legislation is primarily targeted at individuals not in business who are landlords of residential property. Travel deductions can continue to be claimed by the following taxpayers who own the residential investment property:
- Superannuation plans that are not a Self-Managed Superannuation Fund (SMSF),
- Public unit trusts,
- Managed investment trusts, or
- Unit trusts or partnerships, all of the members of which are entities of a type listed above.
Also excluded are taxpayers who are carrying on a business of renting residential properties (e.g. owners of hotels, motels etc.). It is quite rare however that the landlords of individual residential investment properties are carrying on a business, even where they own up to 10 properties. To evidence that a business is being carried on with a property portfolio of less than this, individuals would generally need to demonstrate facts such as that they are servicing the properties (e.g. changing linen, cleaning the property regularly, providing meals etc. during the stay etc.); that they maintain a degree of control over the property (e.g. are able to enter without advance notice, retain a copy of all keys etc.); that they pay all utility expenses such as electricity/gas/water etc. Thus, just merely having a traditional landlord-tenant relationship will not suffice in terms of evidencing that you are carrying on a business unless you have a portfolio of upwards of 10 properties (and even then, a Private Ruling should be sought from the ATO for absolute certainty).
ONLY APPLIES TO RESIDENTIAL RENT
The denial of travel expense deductions applies only to residential premises that are being used by the tenant as a place to live. It follows that deductions will still be allowed for your travel to:
- Residential premises that you own that are being used by the tenant for business purposes (e.g. a house that has been re-fitted into a psychiatrist’s practice, doctor’s surgery etc.)
- Mixed-use premises (e.g. where there is a convenience store downstairs and living quarters upstairs, but only for that part of the travel in relation to the convenience store)
- Commercial premises (e.g. you are the landlord of a bakery or other commercial property).
THIRD PARTY TRAVEL COSTS ARE STILL DEDUCTIBLE
You can still claim a deduction for the cost of employing other parties to carry out tasks on your behalf (such as real estate agents for carrying out property management services such as inspections, or tradespeople for carrying out repairs). Indeed, where your travel expenses are significant, you may now wish to consider engaging the services of these other parties. If you have any questions around these changes, or anything else in relation to your residential or commercial properties, please contact us, DGL Accountants.