RESIDENTIAL RENTAL PROPERTY TRAVEL EXPENSE DEDUCTIONS: ATO GUIDANCE
With effect from 1 July 2017, the Treasury Laws Amendment (Housing Tax Integrity) Act 2017 introduced s 26-31 into the Income Tax Assessment Act 1997 (ITAA 1997) to disallow deductions for non-business travel costs incurred by individuals, self managed superannuation funds (SMSFs) and “private” trusts and partnerships in relation to residential rental properties. Such expenditure is also excluded from forming part of the cost base or reduced cost base of a CGT asset.
Draft Law Companion Ruling LCR 2018/D2, issued by the ATO on 2 May 2018, seeks to supplement the Explanatory Memorandum to this legislation by providing further guidance on the following matters:
• the meaning of “residential premises”;
• the meaning of “carrying on a business” for the purposes of the business exclusion in s 26-31(1)(b), and
• the application of s 26-31 to travel expenditure that serves more than one purpose.
Section 26-31 of 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 (GST Act), which is 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 views on what constitutes “residential premises” for GST purposes are set out in GST Ruling GSTR 2012/5. Draft LCR 2018/D2 mirrors the GST Ruling by providing that:
• the premises must be fit for human habitation and must provide shelter and basic living facilities;
• the term of occupation or intended occupation is not determinative;
• the actual use of the premises as a residence or for residential accommodation is relevant to satisfying the first limb of the definition (concerning actual occupation);
• the second limb of the definition (concerning intended occupation) refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises; and
• the premises may be in any of a number of forms, including single rooms or suites of rooms within larger premises.
Carrying on a business of property investing
A deduction for travel expenses is not denied under s 26-31 of ITAA if the expenditure is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The draft states (as the legislation’s explanatory memorandum did) that 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 then refers to the indicia of business identified by the courts and listed in Ruling TR 97/11 (on carrying on a business of primary production).
In determining whether a business of letting residential properties is being carried out, the draft states that the following additional factors may be particularly relevant:
• the number of residential properties being rented out;
• the hours per week spent actively engaged in managing the properties;
• the skill and expertise exercised in undertaking these activities; and
• whether professional records are kept and maintained in a business-like manner.
The draft adds that it is more difficult for individuals to demonstrate that they are carrying on a business of property investing than it is for companies (which are specifically exempt from s 26-31 anyway). In the ATO’s preliminary 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”.
Apportionment if travel expenditure serves mixed income-producing purposes
The expenditure made non-deductible by s 26-31 is a loss or outgoing “insofar as it is related to travel”. According to the draft, the use of the word “insofar” means that an apportionment is required if there are mixed income-producing purposes for the travel costs. If a single outlay of travel expenditure is incurred partly for producing income from the use of residential premises as residential accommodation and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to make a fair and reasonable assessment of the extent to which the amount relates to each purpose. When apportioning an indiscriminate sum, factors that may need to be taken into account include floor-area ratio, rental income and travel time spent attending to each income-producing purpose, the draft says.
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