Edited version of your written advice

Authorisation Number: 1051408610521

Date of advice: 1 August 2018

Ruling

Subject: Travel expenses – rental – body corporate

Question 1

Are you entitled to claim the travel expenses incurred in relation to your investment properties under sections 8-1 and 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are you entitled to claim the travel expenses incurred whilst undertaking your roles on behalf of the body corporates under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You are the joint owner of residential investment properties.

You are the sole owner of another residential investment property.

All the investment properties are situated in highly populated areas.

The investment properties are managed by registered real estate agents who collect the rental income and pay most of the expenses for each property from the rental income received.

You hold positions on various committees in relation to the rental properties and regularly attend meetings.

You have completed numerous trips to your investment properties during the year.

You do not use any of the properties for private purposes.

The properties are tenanted by unrelated third parties on a full time basis.

You regularly meet with contractors on behalf of the bodies corporate in relation to the assessment of tender applications for capital works and or maintenance, inspection of repair work being undertaken and review of completed and proposed repair work.

You also attend strata committee meetings, annual general meetings, building management tender meetings and onsite meetings with contractors, security and cleaners.

You also pick up faulty property items and return them to the property when they have been repaired or deliver new property items if they have been replaced.

You do not receive any payment in order to fulfil your voluntary roles with the strata bodies or building management committee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-31

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Rental Properties – Travel Expenses

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.

Under the previous legislation, the full cost of travel to inspect or maintain a rental property had been an allowable deduction under section 8-1 of the ITAA 1997 (if the sole purpose of the travel had been incurred in connection with gaining income from the investment property).

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received royal assent on 30 November 2017 to disallow any deductions for cost of travel you incur relating to a residential rental property. The application of the amendment applies to a loss or outgoing incurred and is effective from on or after 1 July 2017.

Section 26-31(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states you cannot deduct a loss or outgoing you incur after 1 July 2017 if:

● it is related to travel,

● it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodation, and

● it is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Under the new legislation you are no longer able to claim any deductions for the cost of travel you incur relating to a residential rental property unless you are carrying on a business in property investing or are an excluded entity.

Under subsection 26-32(2) an excluded entity is a:

● corporate tax entity;

● superannuation plan that is not a self-managed superannuation fund;

● managed investment fund;

● public unit trust; or

● unit trust or a partnership, all of the members of which are entities of a type listed above.

The Explanatory Memorandum to the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 states at paragraphs 1.20 - 1.22:

1.20 These amendments deny deductions for travel expenditure incurred to gain or produce assessable income from the use of residential premises as residential accommodation. This includes travel for activities undertaken to gain or produce rental income from an entity’s residential investment property, such as, but not limited to, inspecting, maintaining, or collecting rent for the property. [Schedule 1, item 2, subsection 26-31(1)]

1.21 For the purposes of these amendments, the ordinary meaning of ‘travel’ applies. Travel expenditure would be expected to include motor vehicle expenses, taxi or hire car costs, airfares, public transport costs, and any meals or accommodation related to the travel.

1.22 The travel is not restricted to travel to the relevant property. For example, travel undertaken to attend an apartment building owner's corporation meeting or visit a real estate property manager to discuss the property is also not deductible (emphasis added).

Similar to prior years, the travel expenditure cannot be included in the cost base of the rental property/ies for the purpose of calculating your capital gain or capital loss when you sell the property/ies.

Carrying on a business

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on. The factors must be considered in combination and as a whole and whether a business is being carried on depends on the large or general impression gained from looking at all the factors, and whether these factors provide the operations with a commercial flavour.

Normally the receipt of income from the letting of property to tenants does not amount to the carrying on of a business (Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald’s case); Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps’ case); Case X48 90 ATC 384; (1990) 21 ATR 3389).

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps case), the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties.

Paragraph 51 of Taxation Ruling TR 2003/4 Income Tax: boat hire arrangements (which is about whether boat charter activities generate business or investment income) states:

Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property.

The Rental Properties 2018 guide (Rental Properties guide) published by the Australian Taxation Office, states the following at page 6:

Most rental activities are a form of investment and do not amount to carrying on a business.

These statements indicate that a person who simply owns an investment property or several investment properties, either alone or with other co-owners is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities. There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels.

Travel incurred in relation to body corporate meetings

Taxation Ruling IT 39: Expenditure incurred in servicing or managing income producing investments - application of section 51(1) considers the deductibility of expenditure incurred in servicing or managing income producing investments. IT 39 states that where expenditure is incurred in 'servicing' an investment portfolio (such as consulting with inter-state stock brokers and attending inter-state stock exchanges), the expenditure should properly be regarded as incurred in relation to the management of income producing investments and thus as having an intrinsically revenue character. The travel expenses incurred by the taxpayer in attending the company annual general meeting (AGM) are costs incurred in servicing their investment portfolio.

Application to your situation

Based on the information and documentation provided, it is the Commissioner’s view that your rental property activities are the leasing of residential properties to receive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the properties.

As it is not viewed that you are carrying on a business in relation to your rental properties and you are not an excluded entity as outlined above you cannot claim deductions for any travel expenses incurred in relation to your rental properties under subsection 26-31(1) of the ITAA 1997.

You incurred travel expenses to attend meetings and annual general meetings (AGMs) for the strata body. You were the chair and a member of the executive committee for one of the strata bodies and you were required to attend meetings, perform inspections and perform other duties to fulfil your voluntary roles. You are not paid to perform these roles. You attended the meetings in your capacity as the chair and member of the executive committee of the strata, which is voluntary, and not sufficiently connected to your rental income. However, your participation in the body corporate as the chair and member is consequential to you owning a property in the strata complex. Your primary reason for attending the AGM and strata meetings is considered to be your interest as a property owner. As a property owner you are considered to be servicing your investment by attending these meetings. Therefore the travel expenses you have incurred to attend the AGMs have a sufficient connection to your rental income.

As it is considered that the travel expenses incurred to attend the AGMs have a sufficient connection to your rental income from the use of the residential premises as residential accommodation those expenses also are not deductible under subsection 26-31(1) of the ITAA 1997.

Question 2

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 by an individual in gaining or producing assessable income except where the outgoings are of a capital, private, or domestic natures, or relate to the earning of exempt income.

A number of significant court decisions have determined that, for an expense to satisfy the tests in section 8-1 of the ITAA 1997:

● it must have the essential character of an outgoing incurred in gaining assessable income, or in other words, of an income producing expense

● 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, and

● it is necessary to determine the connection between the particular outgoing and the operations or activities by which you most directly gain or produce his your assessable income.

For a deduction to be allowed there must be sufficient nexus between the loss or outgoing and the assessable income. The expense must give rise to or help produce assessable income for it to be deductible.

Application to your situation

You volunteer your time to perform your roles for the strata body/ies. You incurred travel expenses in relation to fulfilling your roles. You did not receive payment or reimbursement for your services or for the travel expenses incurred. The voluntary service provided is not sufficiently connected to your rental income. Therefore the voluntary work is not deductible as there is no nexus between income and deduction.

Your time and services are given voluntarily and no assessable income for the work is received. The expenses are incurred in relation to the voluntary work and the expenditure was not incurred in the course of gaining or producing assessable income.

Accordingly, the expenditure was not incurred in the course of gaining or producing your assessable income. You are therefore not entitled to a deduction under section 8-1 of the ITAA 1997 for the costs incurred by you.