Edited version of private advice

Authorisation Number: 1051595064762

Date of advice: 17 October 2019

Ruling

Subject: Carrying on a business of letting rental properties - claiming deductions for travel expenses

Question 1:

Are you carrying on a business in relation to your rental properties?

Answer:

No

Question 2:

Can you claim deductions for your travel expenses incurred in relation to your rental properties?

Answer:

No.

As it is viewed that you are not carrying on a business of letting your rental properties you cannot claim deductions for your travel expenses incurred in relation to those properties because section 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997) denies this claim.

This ruling applies for the following period

Income year ending 30 June 2020

The scheme commences on

1 July 2019.

Relevant facts and circumstances

You use the following properties, collectively referred to as the Properties, in relation to your rental activities:

You purchased the Properties so that you could have passive income in the future and the rental income from your properties will commence being your only source of income during the period covered by this ruling.

You are not registered for an Australian Business Number as your gross income is less than $75,000.

You have paid off the mortgages for both properties.

The tenants pay the rental amounts directly into your bank account.

You arrange for the Properties to be advertised for rent on various web sites.

You write all of the advertisements for the Properties, engage a company to publish the advertisements, organise photos and house plans, monitor and reply to all enquiries, and organise open house inspections. The Properties have been advertised on X occasions.

The tenants contact you directly for all repairs, issues and maintenance work and you are available 24 hours per day and you have procedures and processes in place so that you can respond to issues at any location and organise repairs and maintenance for both properties.

You had interviewed and reviewed numerous property management agents and could not find a suitable agent, and had made the choice to manage your properties for the following reasons:

·         you could not find a suitable managing agent

·         friends and work colleagues have shared their bad experiences with incompetent property managers

·         you have decided that it is the more cost effective and efficient for you to manage your properties so that you do not incur any agent's fees or inflated third party invoices

·         you consider that it is a better outcome for the tenants because they can contact you directly and you can respond to issues quicker and more efficiently which results in issues being fixed immediately and to a higher quality standard.

The Properties are leased as long term rentals on XX month minimum leases which are renewed every XX months.

You process and respond to all rental applications and queries, interviewing and assessing all potential tenants, performing reference checks, keeping records of correspondence in relation to potential tenants, drawing up and negotiating lease agreements and managing and organising bond payments with the tenant and Residential Tenancies Bond Authority.

In relation to repairs and/or maintenance, you either fix the repairs yourself or engage the services of qualified tradespeople when you organise quotes, suitable time/s for the tenant and tradespeople for the activities to be undertaken, provide access to the property if the tenant is not available, and pay invoices.

You have undertaken the following activities during the 2019-20 income year to the present time:

You conduct all property inspections and write up all inspection reports for entry, exit and ongoing inspections and have completed the following inspections in relation to the Properties:

You keep the following records in relation to the Properties:

·         copies of invoices, receipts and details of payments and proof and purchases

·         electronic spreadsheet to record receipts, payments and rental deposits for each property;

·         copies of agreements such as leases, bond lodgement forms and rental receipts from each tenant;

·         records of asset purchase dates and agreements; and

·         depreciation details and depreciation schedules.

The number of hours you spend on the property activities changes depending on any issues arising, and your activities include the following activities:

·         facilities managementcan be greater than XX hours and includes scheduling and organising maintenance and repairs with tenants and tradespeople, negotiating and reviewing contracts, organising regular inspections, resolving emergency issues, supervising tradespeople at the Dorcas Street Apartment and addressing issues with the Key Safe Box and house keys in relation to the Property;

·         tenant relationswhich includes responding to tenants correspondence, developing rental agreements, selecting tenants, collecting deposits, rent and tracking payments/deposits, resolving tenant's complaints, enforcing terms of rental agreements, overseeing evictions, preparing and/or providing instructions/manuals on how to use equipment in the properties, maintaining a Dropbox folder with the relevant equipment manuals;

·         training which includes keeping up-to-date with local, state, and federal laws and regulations;

·         office administrationsuch as checking and recording rental payments and deposits, negotiating contracts with vendors, such as insurance policies and paying invoices;

·         marketing and/or leasing propertieswhich includes ensuring that the properties are occupied with qualified tenants through advertising and writing advertisements, organising open house with existing tenants and prospective tenants, responding to advertisement enquiries and paying marketing invoices;

·         entry of new tenantsincludes processing of application forms and correspondence, keeping track and recording who had visited the properties, reviewing and vetting application submissions, ensuring that forms have been correctly filled out and identification had been provided, conducting reference checks, preparing leases and drawing up terms and conditions, organising bond documentation and payment and correspondence with tenant, organising keys and property information pack, organising entry inspection, reviewing report and providing report to tenant and paying invoices

·         exiting tenants (Property A)which includes organising exit property inspection with tenant, reviewing exit report and addressing any repairs that the tenant will pay to fix, responding to tenant's correspondence and paying invoices; and

·         exiting tenants (Property B) which includes organising and performing exit inspection, writing up and processing exit report, providing correspondence to exiting tenant to agree on any issues that need to be fixed, organising tradespeople to fix issue, processing release of bond and organising the return of keys.

You are a committee member of Property B's body corporate and participate in their board meeting held every three months, attending to committee correspondence and presently you are organising quotes for new underlay and carpet installation through the whole building complex.

You do not have any plans to expand or reduce your rental property activities at present, or in the near future. You consider that managing two rental properties creates the same volume of work as ten rental properties, but with less financial risk and pressure.

You have not disposed of any rental property/ies you owned when seeking a better return than rental income.

In previous income years you have recorded income and expenses relating to the Properties at the Gross Rent labels in your income tax returns and in the past ten income years you had made net rental losses in X of the income years and net rental gains in the other income years and the rental from Property A had remained the same in X income years.

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

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Question 1:

Summary

It is the Commissioner's view that you are not carrying on a business of letting rental properties. Your activities are better described as leasing of two residential properties to receive passive income from a stream of rental income, and are those of a passive investor.

Detailed reasoning

Carrying on a business

Section 995-1 of the ITAA 1997defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Paragraph 8 of Taxation Ruling TR 2003/4 (TR 2003/4) (which is about whether boat charter activities generate business or investment income) states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of TR 2003/4 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.

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

Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business.

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case. Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual.

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. The Tribunal also made the following observation about Taxation Ruling IT 2423:

The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ''... if rent was derived from a number of properties or from a block of apartments that may indicate the existence of a business''.

Paragraph 5 of IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative.

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.

On the other hand, Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. In reaching that conclusion, the Board found:

It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period.

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.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

·         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.

These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. The analysis in relation to rental properties will reflect that the alternative outcome to carrying on a business in relation to rental properties will be that the activities are an investment in rental properties.

TR 97/11 states 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 the Rental Properties 2019 guide (the 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.

The Commissioner sets out two examples in the Rental Properties guide 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.

The first example, Example 3 on page 6 of the guide, outlines a situation in which the owners are not carrying on a rental property business. The Commissioner states:

The Tobin's owned, as joint tenants, two units and a house from which they derive 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.

The second example, Example 4 on page 6 of the Rental Properties guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states:

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.

Applying the relevant cases and indicators to your circumstances

In many instances, it is obvious that an activity is being carried on as a business and no further investigation is required.

Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests are to be applied in reaching such a determination.

In this case, we are considering the question of 'Are you carrying on a business' with the other potential outcome being that your activities constitute an investment that generates assessable income.

After weighing up the relative business indicators and objective facts surrounding this case, it is considered that the information and documentation provided does not support that a business is being carried on in relation to the letting of the properties during the period covered by this ruling.

We have made the following observations when determining whether your activities are the carrying on of a business:

The 'significant commercial purpose or character' indicator is closely linked to the other indicators. It is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

In this case you are renting out X properties for a minimum period of XX months which are renewed every XX months being for long periods to long-term stable tenants for at least XX months. There is no evidence to suggest that the Properties are rented as short term (nightly or weekly) rentals; rather, they are rented under lease agreements which are typically long term in nature. The relationship between you and the occupiers of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties.

The number of rental properties used in your activities are less than those used in Case 24, the Cripps case and Case 26 in which it was held that a business of letting rental properties was not being carried on. Given that you only have X rental properties, it cannot be viewed that your activities have a commercial character or are being undertaken for a commercial purposes. Additionally, you have stated that you want to passively hold the Properties which is not indicative of holding properties for commercial purposes.

The carrying on of a business is not merely a matter of intention alone. Rather, it is a matter of activity motivated by intention. It is appropriate to look objectively at the activity (including when it started) to reach conclusions about a taxpayer's state of mind in deciding to conduct the activity.

Both business and investment will have a profit making intention whereas a hobby will not. Strategies that minimise the costs of pursuing a hobby will not amount to having a profit making intention.

In general terms, a business activity will be seeking to more efficiently allocate resources than a mere investment and will seek to conduct the activity in a way that provides a return that is higher than the investment levels received by others conducting similar activities. A business may seek to adapt to changing circumstances by altering the form or nature of the allocation of those resources. A business may be seen as being more open to taking risks to pursue these outcomes.

Additionally, a business intention would be to maximise income-profits and to review activities to determine if better returns could be made, such as gains made from selling a property to capitalise on any capital growth with the resulting funds to be reinvested in activities that would provide a better return than the rental income being received from that particular property.

You state that on average you spend XX hours per week minimum on your rental property activities which can vary according to what issues are occurring. A number of the activities that you have indicated that you undertake in relation to the X rental properties are not carried out frequently, such as the renewing of leases given that the leases are for a minimum of XX months which indicates that the renewing of leases for existing tenants, or undertaking activities to find potential tenants, would only occur once a year. The activities you undertake are also not dissimilar to those undertaken by a property investor.

You have stated that you do not intend to expand or reduce your property holdings. There is no evidence to support that you are seeking to expand or grow your activities through seeking opportunities to buy additional property/ies and/or sell existing property/ies and use the proceeds to buy other property/ies that will provide a greater return which is suggestive of a business-like intention. This indicates that you are keeping the Properties as long term investments similar to rental property investors.

Additionally, nothing has been provided to support that you are seeking to attract higher paying tenants by undertaking any actions, such as renovations, in order to receive higher rental returns.

You are responsible for keeping the Properties in a fit state of repair so that they are suitable to be rented out, but do not provide any direct services to the tenants. It would be reasonable to expect any property owner, either in general or a passive investor, to undertake any repairs/maintenance they have the capacity to undertake to reduce costs. The ongoing repair and maintenance of rental properties is considered incidental to the ownership of the properties and are incurred to bring the property back to its functional condition.

It would be reasonable to expect any property owner, either in general or a passive investor, to undertake any repairs/maintenance they have the capacity to undertake to reduce costs.

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

You charge the market rate for the rental of the Properties and you recorded the same gross income amount of $X,XXX for Property A for X income years prior to the purchase of Property B. In the past XX income years you have made rental losses in X income years and rental gains in the remaining X income years. You made net rental losses in X income years and net rental gains ranging from $XX to $XX,XXX in the other income years.

You do not have a business plan and state that you purchased the Properties so that you could have passive income in the future in addition to being self-employed for better working conditions with no financial risk or pressure. This is not dissimilar to other taxpayer's who have invested in a number of rental properties for the same desired outcome of receiving passive income and may indicate that you are keeping your investment properties long term investments similar to rental property investors.

No money is currently owed on either property with the mortgages having been paid.

While you have invested capital into the acquisition of the Properties, and the activities have been undertaken for a significant period of time, the activities are considered to be in line with those required of a passive investor in rental properties that have been used in the current manner for an extended period of time, being for earning rental income over a long period of time.

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.

In comparison to some rental property owners your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded the level of repetition and regularity of your activity is not the same.

We are looking at those activities that would be required in the renting of properties. If there was a block of 30 holiday units rented on a short time basis there is an extensive amount of work conducted on a daily basis in meeting tenants, providing cleaning, linen and other services. The fees paid by the tenants are for both the services and the use of the property and if it is of sufficient scale, because of the regularity of these services it can be argued that they could be carrying on a business of renting properties.

Your property activities are of a different nature to this. Your lease periods are of a longer time frame being XX months and during the current income year until the present time you have:

·         undertaken gardening activities at Property A during X months and are currently organising quotes for the tidying up of the garden to occur in a future month; and

·         you replaced a dishwasher and replaced leaking taps in Property B in one month.

These activities are to keep the Properties in a fit condition to be rented which are not dissimilar to anyone who has an investment property. In relation to the gardening activities, these are considered to be general maintenance of the Properties and are not definitive when making a decision on whether a business is being carried on as they are activities that are undertaken regardless of whether the property is used for personal use, investment or in relation to the carrying on of a business.

It is a rare business that does not seek to maximise its revenue by maintaining its assets to an acceptable standard, and while not decisive, it is relevant. But in doing that, it does not mean that they have conducted their activities in owning and managing the properties in a manner that is business-like. It would also be reasonable for an investor to renovate and/or repair and maintain their rental properties to earn higher rental income and/or appeal to a different tenant market.

Whilst you have advised that you inspect the properties, personally undertake the repairs, maintenance or organise for tradespeople to complete the activities on the Properties, and maintained accounts in relation to your rental properties, the activities you undertake in relation to your properties would also be undertaken by a property investor as was found in Case 24.

The management and maintenance of the Properties is undertaken by you. However, the level of repetition of the activity is not as great as that noted in Case G10 which involved 12 units used for short-term accommodation. The activities of the taxpayer in that case was far greater than in your activities in relation to your two properties, being a seven day a week activity and the size and scale of the activities undertaken by the taxpayers.

The level of repetition and regularity of your activities is not as great as that noted in Case 26 where despite the management and maintenance activities undertaken in relation to 22 properties,the property owners were not considered to be carrying on a business of letting properties.

While you manage the Properties yourself, your activities are not different to a property investor with a small number of properties who decides to manage their properties themselves. The mere act of managing the properties yourself does not by itself change your activities from being those of an investor to someone carrying on a business in relation to their rental properties.

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business.

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists.

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.

Your activity is renting out residential properties at market rates. This is similar to many other rental property owners who hold their properties as investments. Hence the relationship in respect of this test is indicative of a landlord and tenant.

Property owners carrying on a business in relation to property would include the property as trading stock of the business. Trading stock includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business. Additionally, income and expenses arising in relation to business activities would be recorded in income tax returns as 'business income' and 'business expenses'.

You have recorded your rental income and expenses at the 'Gross Rent' labels in your income tax returns, similar to how an investor would record their income and expense amounts arising in relation to their investment rental properties.

The overall impression is that you are not carrying on a business of renting properties. The income is derived predominantly from the letting of the Properties and not from activities 'carried on' in relation to renting the Properties out.

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer.

You keep records in relation to your activities such as receipts, expenses, agreements, leases, bonds, depreciation, purchases of the Properties in addition to keep a spreadsheet to record the receipts, payments and rental deposits. It is reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental property/ies so that they can keep informed as to whether or not they are making a profit in relation to the rental property/ies and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns.

It may be arguable that rental property businesses might keep more detailed records than mere investments so that they can be better positioned to take advantage of opportunities that arise. This test is more relevant when the potential alternate outcome is that the activity constitutes a hobby. Your activities do not have the nature of a hobby.

When considering the size and scale of the activity we are looking at the scale in terms of the number of properties and what management input that may be required to conduct the activity.

Where size and scale is a relevant factor, the activity should be large enough to make it commercially viable as a business. In Cripps' Case, it was held that the renting of 14 two storey townhouses was not a business and in McDonald's Case it was held that the letting of two units in different strata plans was also not a business. Similarly in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business.

The scale of your activities and volume of operations can be distinguished from the cases noted above as you have rented fewer properties during the ruling period.

It had been determined that a business was being carried on in the D'Souza case as provided above, however your situation can be distinguished from the facts provided in that case as there are less rental properties in this situation.

You are a member of the corporate body committee in relation to Property B which is a voluntary position that can be held by anybody who owns a property in the building where that property is located. The holding of this position is not indicative of whether or not a business in relation to the letting of rental properties is being carried on.

After weighing up the relative business indicators and objective facts surrounding this case it is considered the information and documentation provided does not support that a business is being carried on in relation to your rental properties during the period covered by this ruling, or that your activities are commercial in purpose or nature.

Based on the information and documentation provided, it is the Commissioner's view that your rental property activities are better described as leasing residential properties to receive passive income from a stream of rental income that you receive merely from holding the Properties. The income is not derived from the services provided to the tenants, but from the owning and letting of the properties.

Accordingly, it is the Commissioner's view that you are not carrying on a business of letting rental properties and are a passive investor with two rental properties.

Question 2

Summary

As it is viewed that you are not carrying on a business in relation to your rental property activities, you are not eligible to claim any deductions in relation to your travel expenses incurred in relation to the Properties.

Detailed reasoning

Rental property 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. In other circumstances you may be able to claim a partial deduction for your travel expenses.

However, from 1 July 2017 new legislation has been introduced which states that travel expenses relating to a residential investment property are not deductible unless certain conditions are met. The new legislation was introduced as an integrity measure to address concerns that many taxpayers had been claiming travel deductions without correctly apportioning costs, or had claimed travel costs that were for private travel purposes.

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.

An excluded entity is a:

·         corporate tax entity;

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

·         public unit trust;

·         managed investment fund; or

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

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.

Application to your situation

In your situation you have travelled to Property A during X months in 2019 and undertook activities in relation to that property during your visit.

As outlined above, it is not viewed that you are carrying on a business in relation to your rental properties. Additionally, you are not an excluded entity as outlined above. Therefore, you cannot claim deductions for any travel expenses incurred in relation to your rental properties.

Conclusion

The Commissioner considers you are not carrying on a business of letting rental properties. Whilst you personally perform most of the activities required for the managing and maintenance of your rental properties, your scale of your activities and volume of operations is too small to be considered as carrying on a business.

You do not meet the conditions to be eligible to claim travel expense deductions. Therefore, you cannot claim any deductions for travel expenses incurred in relation to travelling to either of the Properties.