ATO IDENTIFIES 26,000 INCORRECT RENTAL PROPERTY TRAVEL EXPENSE CLAIMS
The ATO has identified 26,000 taxpayers who have claimed deductions during tax time 2018 for travel to their investment residential rental properties, despite recent changes to the tax laws that disallow such claims. From 1 July 2017, investors cannot claim travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property as deductions, subject to certain exceptions: s 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997).
Rental property investors should check if their situation matches one of the exceptions to this change before they lodge any claim for rental travel. An exclusion does apply for this restriction on travel expenses if the expenditure is necessarily incurred in carrying on a business for income-producing purposes (including a rental property business), or if it is incurred by an “excluded entity”, namely:
• a corporate tax entity,
• a superannuation fund that is not a self managed superannuation fund (an SMSF);
• an approved deposit fund (ADF) or a pooled superannuation trust (PST);
• a public unit trust;
• a managed investment trust; or
• a unit trust or partnership.
If the travel expenditure is incurred by a unit trust or partnership, it will only be deductible if all members of the trust or partnership are excluded entities. See also the ATO website at www.ato.gov.au/rentaltravel and refer to Law Companion Ruling LCR 2018/7 Residential premises deductions: travel expenditure relating to rental investment properties.
Note that the restriction only applies to travel expenses in relation to a “residential rental property”. As such, it is still possible to claim a deduction for travel expenses in relation to commercial property that falls outside the definition of “residential premises” used as residential accommodation. Of course, the other deduction requirements in s 8-1 of ITAA 1997 must still be satisfied.
Golden rules for deductions
The ATO now uses sophisticated data analytics to assess a range of deductions and claims. Taxpayers must follow three golden rules when claiming a deduction:
• the taxpayer must have spent the money (and not been reimbursed);
• the claim must be directly related to earning the taxpayer’s income; and
This implements the Government’s proposal to accelerate the reduction of the corporate tax rate for corporate tax entities that are base rate entities (ie corporate tax entities that derive no more than 80% of their income in passive forms and have an aggregated turnover of less than $50 million). The corporate tax rate for base rate entities will now reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years. This means eligible corporate taxpayers will have a tax rate of 25% in 2021–2022, rather than from 2026–2027 as under the previous law.
The new law also increases the small business income tax offset rate to 13% of an eligible individual’s (ie unincorporated business’s) basic income tax liability that relates to their total net small business income for 2020–2021. This offset rate will then increase to 16% for 2021–2022 and later income years.