Edited version of your written advice

Authorisation Number: 1012821338338

Ruling

Subject: Rental property

Question

Are you entitled to a deduction for the portion of your travel and telephone/internet expenses incurred which are directly related to your income earning activities?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts

You are a resident of Australia for taxation purposes.

You have a rental property overseas.

The property has been available for rent since 20XX. Rentals are short term stays from 3 days to 4-6 weeks.

In 20XX the property was rented for approximately 28 weeks. For 20XX, bookings are at 30 weeks.

The property is advertised on a commercial holiday rental websites and social media in over 20 countries.

You travelled overseas and did the following rental property activities:

• inspect the rental property and carry out repairs,

• meet with Property Manager for property issues and current rental conditions,

• meet with Body Corporate property manager,

• meet with Tax Representative,

• meet with Insurance agents, banking managers and shops to discuss banking matters, replace and repair decor items,

• meet with alternative suppliers for cleaning and property management,

• meet with wireless and World Net TV representatives on wireless access and improved reception for TV and set top box communications,

• travel to locations to source repair items.

You also did sightseeing tours for private purposes.

You have a travel diary for your overseas trip.

You incurred costs for airfares, car hire, petrol, tolls, parking, telephone and internet, public transport, food, drink, cleaning and accommodation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Allowable deductions

Section 8-1 of the Income Tax Assessment Act 1997 (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. 

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 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 is apportioned if it is only partly incurred to produce assessable income.

Travel expenses

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business 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 relevant in your circumstances.

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.

In your case, it is not considered that your expenses are wholly incurred in gaining assessable income. We accept that your rental property activities carried out in country A have a sufficient connection to producing your assessable income. However, as you did some private travel and sightseeing while overseas, we consider that only a portion of the associated expenses are deductible.

As your travel 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.

The portion of your airfare, car hire, petrol, tolls, parking, food, drink, accommodation, telephone and internet costs incurred that directly relate to your assessable rental income are allowable deductions under section 8-1 of the ITAA 1997.