Edited version of your private ruling

Authorisation Number: 1051590934292

Ruling

Subject: Travel expenses

Question 1

Are you carrying on a business of letting rental properties?

Answer

No

Question 2

Are you entitled to a deduction for travel expenses relating to your residential rental properties under sections 8-1 and 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You and your spouse own seven residential rental properties. The farthest property is located less than 50 kilometres from your residence.

You collect $XX,XXX per year in rent and the properties are almost 100% tenanted during the year.

You make a profit each year and this profit will increase next year due to a new property being rented for the whole year.

You completed XX visits during the 2018-19 financial year. This covered existing and new tenants.

The purpose of the visits included showing prospective new tenants, new tenants moving in, old tenants moving out, urgent and also regular pool maintenance issues, and three monthly inspections.

You and your spouse also work full time and manage your properties in the time available to you.

You have roughly calculated that that you spend a minimum of XXXX hours during the year managing the properties.

This includes all activities associated with the rental properties including advertising, showing the properties, preparing leases and bonds, lodging and collecting bonds, inspection notices and inspections, any maintenance including pool cleaning, collecting rents, exit inspections, cleaning and travel.

You and your spouse share the responsibilities evenly and apportion the expenses accordingly.

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

Summary

Based on the information and documentation provided, you are not carrying on a business of letting rental properties and are a passive investor with a number of rental properties.

You are unable to claim a deduction for any travel expenses incurred on or after 1 July 2017.

Carrying on a business

Normally the receipt of income from the letting of property to tenants does not amount to the carrying on of a business.

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. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations and the repetition and regularity of your activities.

The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below.

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.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'....

In 15 CTBR (OS) Case 26, (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? 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.

Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant in determining whether a business is or is not being carried on:

• whether the activity has a significant commercial purpose or character
• whether the taxpayer has more than just an intention to engage in business
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity
• whether there is regularity and repetition of the activity
• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business
• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit
• the size, scale and permanency of the activity, and
• whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). The indicators 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' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

In Administrative Appeals Tribunal (AAT) case of YPFD and FCT [2014] AATA 9 (YPFD case), the following statement about the tests that are relevant when the issue involves residential rental properties was made:

16.  The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include:

(a)   the nature of the activities and whether they have the purpose of profit-making;

(b)   the complexity and magnitude of the undertaking;

(c)   an intention to engage in trade regularly, routinely or systematically;

(d)   operating in a business-like manner and the degree of sophistication involved;

(e)   whether any profit/loss is regarded as arising from a discernible pattern of trading;

(f)    the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case).

In Rental Properties guide 2018 the Commissioner sets out two examples that discuss the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business.

Example 3 on page 6 of Rental Properties 2018 outlines a situation in which the owners are not carrying on a rental property business.

Example 3: Co-owners who are not carrying on a rental property business

The Tobin's own, as joint tenants, two units and a house from which they acquire rental income. The Tobin's occasionally inspected the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobin's do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobin's devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.

The Tobin's are not partners carrying on a rental property business - they are only co-owners of several rental properties.

Example 4 on page 6 of Rental Properties 2018 outlines a situation in which the owners are carrying on a rental property business.

Example 4: Is it a rental property business?

The D'Souza's own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks - each block comprising six residential units - a total of 26 properties.

The D'Souza's actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week - to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collection. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr D'Souza earns from shares, they have no other sources of income.

The D'Souza's are carrying on a rental property business. This is demonstrated by:

• the significant size and scale of the rental property activities;
• the number of hours the D'Souza's spend on the activities;
• the D'Souza's extensive personal involvement in the activities; and
• the business-like manner in which the activities are planned, organised and carried on.

As shown in the above cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities.

After weighing up the relative business indicators and objective facts surrounding this case it is considered that you are not carrying on a business of letting rental properties.

This case can be distinguished from Cripps case as in that case the scale, being 16 properties, was greater than the properties currently held by you. Despite the fact that 16 properties were rented the AAT found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties.

Similarly in Case 26, despite the scale of operations of 22 units, the AAT found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is in excess of the properties you own.

Your circumstances are not similar to example 4 in the Rental Property Guide 2018 as outlined above. In the example, the owners devote a significant amount of time, an average of 25 hours per week each, to manage their properties. A further difference is that you manage seven properties, and the example has 26 properties that are managed.

There is no evidence to suggest that your properties are rented as short term (nightly or weekly) rentals.

Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises.

As you rent your properties on a long term basis you are not undertaking activities such as those undertaken by the taxpayer in Case G10 who was actively involved with his units on a daily basis, and undertaking most of the activities arising in relation to the units himself, with the assistance of his wife.

Given the number of properties owned and the day to day activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded that the scale of your operation and the level of repetition and regularity of your investment activity is the same.

Based on the information and documentation provided, your rental property activities are better described as leasing residential properties to receive passive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the properties.

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 Memorandumto 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.

You are unable to claim a deduction for any travel expenses incurred on or after 1 July 2017. If the expenses relate to 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, the expenses are no longer allowed as a deduction.