Edited version of your private ruling

Authorisation Number: 1012063811241

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Ruling

Subject: foreign rental property expenses

Question

Are your entitled to a portion of your overseas travel and administration expenses incurred in relation to your foreign rental properties?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for tax purposes.

You receive rental income from properties held overseas.

All properties are rented at a commercial rate. You have no relationship with the tenants.

You have not used the properties for any private purpose.

Your relations organize the renting of the apartments under your supervision and with the occasional help of an overseas real estate agent.

You travel overseas once each year to manage the properties.

While overseas you attend the yearly general meeting with the co-owners of the properties. You also sometimes need to supervise works that need to be done on the properties.

You generally stay in overseas for one to three weeks, depending on how much extra work is needed on the properties.

While overseas you usually spend extra time.

You travel with your spouse and generally rent an apartment for the period you are there. You also incur food costs while overseas.

During the year you correspond either electronically, by post or by phone to family members who help you with the management of your properties.

You keep a diary and receipts in relation to your travel and expenses incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Foreign rental income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Rental income is regarded as ordinary assessable income.

Rental income received from properties located outside Australia, as well as the associated deductible expenses, are used to calculate the net foreign rental income/loss amount. The net foreign rent is included in the foreign source income question on the tax return (item 20 on the 2011 tax return supplementary section).

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

§ it must have the essential character of an outgoing incurred in gaining

assessable income or, in other words, of an income-producing expense

(Lunney v. FC of T; (1958) 100 CLR 478,

§ there must be a nexus between the outgoing and the assessable income so

that the outgoing is incidental and relevant to the gaining of assessable

income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47 (Ronpibon's case)), and

§ it is necessary to determine the connection between the particular outgoing

and the operations or activities by which the taxpayer most directly gains or

produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v.

FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

To determine whether your expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and your current income-earning activities. The intention or purpose in incurring an expense can be an element in determining whether the whole or part of the expense is an allowable deduction. 

The words 'to the extent to which' signify that an expense may be apportioned if it is only partly incurred to produce assessable income. In Ronpibon's case, the High Court expressed the view that '... there are at least two kinds of items of expenditure that require apportionment'. These were generally: those items that are capable of dissection; and those that cannot be dissected but should be apportioned on the basis that they serve more than one object indifferently. The latter would clearly apply to an airfare purchased for both work and private purposes (Case R13 84 ATC 168; 27 CTBR (NS) Case 64).

Taxation Ruling TR 98/9 discusses the apportionment of overseas travel expenses where there is a dual purpose for the travel. Although this ruling deals with deductions of self-education expenses, the principles are the same for all cases requiring apportionment and could equally apply to rental property travel expenses.

As highlighted in TR 98/9, if the travel was undertaken equally for income earning purposes and for private purposes the expenses would be apportioned equally.

However, where a taxpayer is overseas for several weeks and only one week is related to income producing purposes, it may be more appropriate to apportion the associated travel costs on a time basis.

We accept that your travel overseas relates in part to producing your assessable income. However, as your time overseas also involves other private matters, it is necessary to apportion your costs. In your circumstances, it is reasonable to apportion the cost of the airfare according to the time spent on your income earning activities and the time spent on other private purposes. As such, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the income producing portion of your return airfare to Paris.

Please note the airfare costs associated with your spouse are considered private in nature and are not deductible under section 8-1 of the ITAA 1997.

Administration costs

A deduction is allowable under section 8-1 of the ITAA 1997 for the cost of telephone calls, postage and computer running costs made in the course of earning your assessable rental income.

Telephone calls that relate to your rental properties are deductible and may be identified from an itemised telephone account. However, where a phone call has a private aspect as well, the cost directly relating to your rental properties only is allowed.

You cannot claim a deduction for the costs of connecting a telephone, telephone rental costs or a mobile phone as they are capital expenses.

Similarly the income producing portion of postage costs and your computer costs are also an allowable deduction.

You need to ensure that you only claim the income producing use of the computer. You should keep a diary of the computer use to show your income producing hours as well as the private use by you and your family so that you can calculate the correct income producing portion.

Accommodation and meal expenses

A proportion of your accommodation and meal expenses are an allowable deduction. However, it is only the portion that directly relates to the days you carried out significant activities associated with your rental property. Accommodation and meal expenses need to be apportioned to exclude any costs that relate to your spouse or private purposes.

Apportionment of expenses

As your expenses are not fully deductible, you will need to apportion the expenses using a reasonable basis. Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances.

Substantiation requirements

Division 900 of the ITAA 1997 sets out the substantiation requirements for claiming expenses. Written evidence must be maintained in respect of work related travel expenses.

Section 900-20 of the ITAA 1997 provides that a travel record must be kept if the travel involves you being away from your ordinary residence for six or more nights in a row.

A travel record, that is a travel diary or similar document, is a record of activities undertaken during the travel. The purpose of a travel record is to show what activities were undertaken in the course of producing assessable income, so that expenses or portions of them can be attributed to those income-earning activities.

Section 900-150 of the ITAA 1997 states that you are required to provide the following information in your travel records: 

§ the nature of the activity

§ the day and approximate time when it began

§ how long it lasted; and

§ where it was engaged in.