Edited version of private advice

Authorisation Number: 1052195383358

Date of advice: 8 December 2023

Ruling

Subject: Travel expenses - rental properties

Question

Are you able to claim a deduction for travel expenses incurred in relation to your travel to the rental property located in Cairns under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your partner purchased a property as joint tenants located at a specified location on a specified date.

You and your partner lived at the property until a specified date and then moved to City A. The property was then rented out.

You provided us with details about the property.

The purchase of the property was financed by a loan from a bank.

The property is currently rented on a month-to-month basis at a specified amount per week, from a specified date it was increased to a specified amount per week.

Your intention is to resign tenants to a one year lease.

You and your partner inspect the property a specified number of times a year, spending a specified number of days when you visit. During your visit, maintenance of the property is also conducted.

The management of the property is conducted by you.

You have taken a hands-on approach and make yourself available to address tenant's concerns and inquiries, ensuring their needs are met promptly.

On average, you spend a specified number of hours per week attending to various tasks associated with property management, such as pool maintenance, responding to electrical issues, prompt addressing of repairing request, paying water bills and rates. You also make sure that the property is well maintained and in compliance with all relevant regulations.

You maintain meticulous financial records, including income and expenditure statements, rent collection, and expense tracking to ensure that the property remains financially viable and profitable.

You stay abreast of the ever-evolving property laws and regulations and consistently update and adhere to relevant laws and standards to protect both the property and the tenants' rights.

You maintain thorough documentation of all rental agreements, responding to maintenance requests, meticulously documenting financial records to ensure transparency and accountability in all property-related transactions.

You maintain a high level of professionalism in your interactions with tenants, contractors, and service providers to foster a sense of trust and reliability within the property management process.

You are committed to continuously improving the property and its management process, including periodic assessment of rent rates, property enhancements, and staying updated on best practices in the industry.

You advertise the property using word of mouth and your partner's professional network as that is one of the major industries in that location.

You provided an investment plan showing your plan to maximising the profitability of the rental property.

You have incurred substantial expenses associated with travel, accommodation, and related costs while visiting the property and exploring the possibility of claiming these expenses from the 20XX-XX financial year onward.

You and your partner both have additional employment which is your main source of income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

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 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.

Whether you are carrying on a business of property rental is dependent on whether you have the characteristics of a business and how your services differ from that of a landlord. While some of your conduct is businesslike your overall conduct does not show you to be operating as a business. Predominately you operate on a small scale with only a single property and lack a commercial purpose outside of renting the property. Your leasing of the property is the only service you provide and any maintenance you perform is expected of a landlord. As a result, you are not considered to be in the business of property rental.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest is also relevant for the present discussion. This ruling discusses whether rental income constitutes the proceeds of business. Although the ruling refers to situations where rent was being derived, the principles also apply to other situations where accommodation is provided for reward. Paragraph 5 of the ruling refers to the situation of an individual with rental properties and carrying on of business:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

In Commissioner of Taxation v McDonald, B. D. [1987] FCA 318 (McDonald) Beaumont J made a distinction between property investing and carrying on a business, noting that in the carrying on of a business involving property letting services of the nature of those offered by a boarding house would be expected. This was a significant factor in finding that the taxpayer and his spouse were co-investors in their 2 properties rather than in a business of letting rental properties. This being the case the tribunal affirmed that any assignment of profits or losses was a private arrangement between the parties and did not alter their respective obligations or entitlements for income tax purposes.

In Cripps v. FC of T [1999] AATA 937 (Cripps) the taxpayer and his spouse 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 spouse were passive investors and were not in the business of deriving income from rental properties. The number of the properties involved and the nature and extent of the services offered were key factors in this decision.

In Administrative Appeals Tribunal (AAT) case YPFD and FCT [2014] AATA 9 (YPFD), 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 this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour.

In Allen v Federal Commissioner of Taxation [2021] AATA 2768 (Allen) it was held the applicant was carrying on the business of letting rental accommodation involving nine properties. The applicant had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities undertaken were significant in nature and included the personal involvement of the taxpayer in the planting and maintenance of gardens, cleaning, property repairs and maintenance, lease preparation for and attendance to legal disputes, and extensive development of their existing holdings to accommodate more tenants. It was estimated that the development of their existing holdings would increase their annual rental income by $120,000. The tribunal decision considered the extent and nature of their activity as well as their prospects for profit, and found their activities were more than that of a passive investor.

The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

•         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 repetition and regularity of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Whether the activity has a significant commercial purpose or character

An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability.

You have an investment plan and you believe that you can profit from this activity by increasing the weekly rent. You have chosen to take a hands-on approach to the management and maintenance of your properties. You believe that exceeding your tenants service expectations will facilitate early fault identification and repair. You keep yourself up to date on and comply with legal requirements and monitor your potential markets on an ongoing basis. The scale of your current holdings is small, and you hold considerably fewer properties than the numbers taken to be significant in the YPFD andAllen cases.

Whether there is a purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made. You are actively working to increase your rental income by monitoring market rental rates so you can set yours accordingly, and minimising costs. In the Allen case the applicant was making a significant profit and undertaking development of existing holdings to accommodate more tenants and increase his income and profit. In your case, you have not made profit in the 20XX-XX financial year. Any future profit is likely to only result from an increase in the weekly rental and from capital value increase similar to an investment.

Whether there is repetition and regularity of the activity

Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business. In the Allen case the applicant was occupied for the larger part of their working week with their extended involvement in the management, maintenance, and further development of 9 properties. You spent an average of a specified number of hours a week managing the properties and conducted a specified number of inspections a year along with repairs and maintenance during the inspection visits. You also have other full-time work that provides you with a living income. Your commitment to this activity can be considered continuous and regular but not to the same extent as that described in the Allen case.

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

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry. Focusing on a single property whereby you perform all the functions that would be undertaken by a real estate agent and perform all repairs and maintenance yourself. You believe this reduces costs and helps you to develop and maintain good relationship with your tenants, facilitating prompt reporting of and attention to faults and repairs. You are the sole point of contact if tenants need assistance. You do not offer in-house services such as those referred to in the McDonald case and considered one of the characteristics of rental letting businesses in that case.

As noted in YFPD the choice of management in the first person or through an agency is immaterial to the decision on whether someone is in business. In your case, however this choice will have implications for costs such as your travel to properties. If an operation is dealing in smaller volumes, it is less likely that a business is being carried on.

Whether the activity is planned, organised, and carried out in a businesslike manner such that it is directed at making profit

An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit. You manage your records systematically so you can monitor income and expenses to meet your legal obligations.

The size, scale, and permanency of the activity

An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. With joint ownership in one rental property and the scale of your activity is more consistent with that of an investor. As noted above you are operating on a smaller scale than YFPD and Allen, both of whom were considered to be in business with 9 properties apiece, and on a similar scale to McDonald who was considered an investor.

Conclusion

Your rental letting activity has a purpose of profit and is conducted in a systematic and organised way but is on a scale more consistent with that of an investor than one carrying on a business of letting rental properties. The activity you undertake in managing the rental and maintenance of your properties is part time and consistent in nature with that undertaken by an investor regardless of whether they undertake the activity themselves or through an agent. The significance of these factors in determining if a business is being carried on is underlined by the decisions in the above cited cases. In conclusion, single and overall consideration of your case against these indicators gives the impression that you are not in the business of letting rental properties and are a property investor.

As a property investor, you must report income from the property as an investor, and travel associated with your activity will be considered private and domestic and cannot be claimed under section 8-1 of ITAA 1997.