Edited version of private advice

Authorisation Number: 1052143938225

Date of advice: 18 July 2023

Ruling

Subject: Am I in business - rental properties and travel expenses

Question

Are the travel expenses incurred in relation to my rental properties deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are requesting a private ruling from the year ended 30 June 20XX onwards.

You have an ownership interest in numerous investment properties (the Properties).

You purchased a 25% ownership interest in Property A in May 20XX, and became 100% owner in 20XX.

Property A consists of several 2-bedroom units and its council value for rating purposes is over $500,000.

The rent from Property A is paid into an account with your bank. This account is not specifically for Property A.

Approximately XX hours per week are spent attending to matters related to Property A. This time per week takes into account time spent:

•                     Checking if rent is paid.

•                     Recording all rent payments.

•                     Attending to tenancy issues via SACAT (where relevant).

•                     Travel to the property.

•                     Cleaning gutters.

•                     Minor maintenance, such as mowing lawns and cleaning gutters.

•                     Major maintenance, such as repairing holes in walls and painting walls, ceilings and doors.

•                     Bill payments, such as for council, water and tradespeople.

•                     Recording and providing data for tax time each year.

•                     Reconciling all income and outgoings.

•                     Socialising to build a good landlord/ tenant relationship.

You purchased a 25% ownership interest in Property B in May 20XX and became 100% owner in 20XX.

You are the sole owner of Property B.

Property B consists of an old building plus several 2-bedroom units and its council value for rating purposes is over $600,000. The old building has been used on and off for commercial purposes. The units are residential properties.

The rent from Property B is paid into an account with your bank. This account is not specifically for Property B.

An estimated XX hours per week are spent attending to matters related to Property B.

You purchased a 100% ownership interest in Property C in July 20XX.

Property C is a townhouse. Property C's council value for rating purposes is over $300,000.

The rent from Property C is paid into an account with your bank. This account is not specifically for Property C.

An estimated XX hours per week are spent attending to matters related to Property C.

Your family super fund purchased a 25% ownership interest in Property D in June 20XX, and became 50% owner in 20XX. The remaining 50% ownership interest in Property D is owned by your child.

Property D is a new home.

Rent from Property D is paid into a super fund bank account with your bank.

An estimated XX hours per week are spent attending to matters related to Property D.

You purchased your 50% ownership interest in Property E in May 20XX. Your domestic partner owns the remaining 50% ownership interest.

Property E is a 3-bedroom unit, that is part of a group of several units. Property E's council value for rating purposes is over $200,000.

Rent from Property E is paid by the tenant into a joint bank account with the second bank. This account is specifically for Property E.

An estimated XX hours per week are spent attending to matters related to Property E.

You purchased your 50% ownership interest in Property F in June 20XX. Your domestic partner owns the remaining 50% ownership interest in Property F.

Property F is a 2-bedroom unit in a group of several units. Property F's council value for rating purposes is over $200,000.

Rent from Property F is paid into a joint bank account with the second bank.

An estimated XX hours per week are spent attending to matters related to Property F.

You purchased your 50% ownership interest in Property G in June 20XX. Your domestic partner owns the remaining 50% ownership interest in Property G.

Property G is a 2-bedroom unit in a group of several units. Property G's council value for rating purposes is over $200,000.

Rent from Property G is paid into a joint bank account with the second bank.

An estimated XX hours per week are spent attending to matters related to Property G.

You purchased your 50% ownership interest in Property H in July 20XX. Your domestic partner owns the remaining 50% ownership interest in Property H.

Property H consists of several, 2-bedroom units. Property H's council value for rating purposes is over $400,000.

Rent from Property H is paid into a joint account with the second bank. This account is specifically for Property H.

An estimated XX hours per week are spent attending to matters related to Property H.

You self-manage the rental of the Properties.

At the time of purchasing the Properties, they were either already tenanted or made available for rent as soon as settlement occurred.

In addition to managing the tenancies in the properties you individually own, you also manage one tenancy for a property owned by your child and the tenancy of Property D.

You are not paid nor do you charge your family to assist with managing their properties.

The Properties are rented to tenants on long term leases.

You use the standard Tenancies Branch (OCBA) Fixed Term Lease Agreement with all new tenants. You vet all rental applications from prospective tenants.

You prepare all documents related to renting the Properties, such as:

•                     Application Form

•                     Lease Agreement

•                     Inspection Sheet

•                     Information Brochure

•                     Bond Lodgment Form

•                     Bond Refund Form

•                     Lease Extension

•                     Form 7 - remedy a breach of Agreement

•                     Form 2 Application for a SACAT Hearing

•                     When necessary - application to the Magistrates Court for enforcement of an Order.

The tenants in the Properties contact you if they require assistance. You then decide if you can undertake the relevant repairs or maintenance yourself or need to engage a qualified tradesperson.

You undertake routine inspections for the Properties - these may occur 6-monthly for newer tenancies or infrequently when the property contains a long-term tenant. Property inspections generally take no more than 15 minutes each.

You calculate the weekly rent for the Properties based upon your average expenses for council rates, water, maintenance, mortgage interest, size of tenancy and location of tenancy.

You use software to record rental income, lease expiry dates, and Centrelink documents where the tenant elects to use CentrePay for their fortnightly payments.

You advertise property vacancies on realestate.com.au or in the daily newspaper in your state.

On average, you spend 20-25 hours per week managing the Properties.

You have held and managed investment properties since 19XX.

During 20XX, you became redundant from your full-time employment and became reliant on the income received from the Properties. Rent from the Properties is your only source of income.

A bedroom in your home is used as an office. It contains filing cabinets and a large office table, to provide a place for you to manage the Properties. You have archive boxes with details of all the tenants you have had dealing with dating back to 19XX.

You were asked to provide submissions concerning proposed amendments to the Residential Tenancies Act 1995 (SA). The Department of Business and Consumer Affairs made this request to landlords, property managers and tenants to assist with a review they were having in relation to the 'Residential Tenancies Act 1995 (SA)'.

Historically, you have also had an ownership interest in several investment properties.

You do not intend to purchase more properties.

You do not have a written business plan in relation to your activity.

You incur travel expenses related to your rental properties by conducting routine inspections, repairs and maintenance and attending to tenancy issues.

You do not have an ABN for your activity, nor do you lodge your tax returns consistent with being in business based on the advice you received from your Accountant.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-31(1)

Income Tax Assessment Act 1997 section 995-1

Taxation Ruling TR 97/11

Reasons for decision

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.

Subsection 26-31(1) of the ITAA 1997 states you cannot deduct a loss or outgoing you incur to the extent that it is related to travel, if it is incurred to gain or produce assessable income from certain uses of residential premises as residential accommodation. Section 26-31 of the ITAA 1997 applies to travel expenses incurred after 1 July 2017.

Travel expenses are the costs of travel, accommodation and meals, to inspect, maintain or collect rent for the property.

A residential rental property is a residential premises used to provide residential accommodation for the purpose of producing assessable income. A residential premise (property) is land or a building that is:

•                     occupied as a residence or for residential accommodation

•                     intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

For example, a house or a unit used as residential accommodation for the purpose of producing rental income is residential rental property. A caravan or a house-boat is generally not residential rental property.

You can continue to deduct travel expenses relating to your residential rental property if:

•                     you are using the property in carrying on a business (including a rental property business), or

•                     you are an excluded entity.

Carrying on a business

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? sets out the factors which are relevant to determining whether a taxpayer carries on a business of primary production for tax purposes. The indicators are no different, in principle, from the indicators as to whether activities of a non-primary production nature in any other area constitute the carrying on of a business.

The courts have held the following indicators are relevant:

•                     Whether the activities have a significant commercial purpose or character

•                     The existence of a profit-making purpose and a prospect of profit

•                     The complexity and magnitude of the undertaking

•                     Whether the activities involve a degree of repetition and regularity

•                     The size and scale of activities

•                     Whether the activities are systematic and organised, and

•                     The amount of time, effort and capital employed.

No one indicator is decisive, all indicators must be considered in combination and as a whole.

Application to your circumstances

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

Currently, you manage XX properties that you have an ownership interest in as an individual: your activity is of a substantial size and scale and there is a prospect of profit based on this activity providing you with your only source of income.

Whether the taxpayer has more than an intention to engage in business

You do not have an Australian Business Number (ABN) for this activity and your income tax returns have been completed in a manner consistent with you being a Property Investor, rather than being in the business of letting rental properties.

However, you are solely responsible for managing all XX properties including providing minor/major maintenance, collecting rent from tenants and preparing all documents relating to the properties. You have not engaged a real estate agent to do this for you.

Purpose and prospect of profit

You have the purpose of maximising net rent, and you spend a significant amount of time managing your income-producing real estate assets, especially once you ceased employment and this is your only source of income.

Whether there is repetition and regularity of the activity

You have been engaged in your activity since 19XX, you self-managed all of your rental properties, and your activity currently requires approximately XX hours per week of involvement. Aside from your individually-owned properties, you also manage one property held by your Self-Managed Superannuation Fund (SMSF) and one of your daughter's properties. This demonstrates considerable repetition and regularity.

The size, scale, and permanency of the activity

You currently manage XX properties and since 19XX you have managed XX properties all without the assistance of a property manager.

You spend XX - XX hours per week managing the properties.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

The properties are advertised to the general public on realestate.com.au and in the local newspaper. You also self-manage all of the properties and prepare documents including rental application forms, lease agreements and bond lodgement forms etc.

Whether the activity is planned, organised, and carried out in a businesslike manner

Your activity is planned, organised and carried on in a business-like manner, in that you use record-keeping software and have kept archives related to past tenants/ properties used in your activity.

Whether the activity would be better described as a hobby, recreational or sporting activity

Your activity would not be better described as a hobby, recreation, or a sporting activity.

Conclusion

The Commissioner considers you to be in the business of letting rental properties therefore you are entitled to claim deductions for any travel expenses incurred in relation to your rental properties under subsection 26-31(1) of the ITAA 1997.