Edited version of your private ruling

Authorisation Number: 1012462181673

Ruling

Subject: Rental property deductions

Questions and answers

1. Are you entitled to a deduction for X% of travel expenses relating to your foreign rental property including airfares, car hire, accommodation and meals?

Yes.

2. Are you entitled to a deduction for the cost of pharmaceuticals, and attending medical treatment while overseas visiting your rental property?

No.

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You have a rental property overseas.

You were overseas for multiple days.

You went overseas to attend to your rental property.

Some of the time overseas was spent sight seeing (Y%) and the rest (being the majority of the time - x%) was attending to your rental property.

You needed treatment and medication for a pre existing medical condition while you were overseas.

You maintained a travel diary while overseas.

The costs you wish to claim a percentage of relate to airfares, car hire, petrol, tolls and parking, telephone and internet, public transport, food and drink and accommodation.

You have all relevant documentation for substantiation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

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 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (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 involved private site seeing and travel it is necessary to apportion your costs.

A proportion of your accommodation, airfares, car hire, petrol, tolls and parking, telephone, internet and meals 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.

You state that X% of your trip overseas was for business purposes relating directly to your rental property and Y% was for personal sight seeing.

You have kept all relevant documentation for substantiation purposes.

Accordingly X% of your costs associated with your trip overseas to attend to your rental property are deductable.

Medical treatment and pharmaceuticals

The cost of purchasing pharmaceuticals and the cost of medical treatment are not deductible under section 8-1 of the ITAA 1997 as they do not relate to the derivation of income and are private and domestic in nature.

Accordingly you are not entitled to a deduction for the cost of purchasing pharmaceuticals, or for the cost of medical treatment overseas under section 8-1 of the ITAA 1997.