Edited version of private advice

Authorisation Number: 1052371162146

Date of advice: 7 March 2025

Ruling

Subject: Travel expenses - residential rental property

Question

Can you claim a deduction for travel expenses incurred in owning residential rental properties?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX>

Relevant facts and circumstances

Your main residence is located at A.

You purchased a property, located at B.

You are the sole owner of the Property B.

Property B was first made available for rent in XXXX.

Property B has been available for rent for the entire period for which you are requesting the private ruling.

You travel to and from Property B to carry out cleaning and maintenance after guests have checked-out.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-31

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

Reasons for decision

Summary

You cannot deduct the cost of travel to your residential rental property. Under section 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997) travel expenses incurred in owning residential rental properties are not deductible.

Detailed reasoning

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.

Residential Rental 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 houseboat 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. In determining whether you carry on a business of letting residential properties, some of the factors that the commissioner may consider can include:

•                     The total number of residential properties that rented out

•                     The average number of hours per week you spend actively engaged in managing rental properties

•                     The skill and expertise exercised in undertaking these activities and

•                     Whether professional records are kept and maintained in a business-like manner.

Generally, it is more difficult for an individual to demonstrate that they are carrying on a business of property investing than it is for a company. The receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.

Excluded entity

An entity is an excluded entity if, at any time during the income year in which the travel expense is incurred, the entity is:

•                     a corporate tax entity

•                     a superannuation plan that is not a self-managed superannuation fund

•                     a public unit trust

•                     a managed investment trust, or

•                     a unit trust or a partnership, if each of its members are entities of a type listed above at that time during the income year.

The issue of whether individuals are carrying on a business of letting property has been considered by the courts on a number of occasions, some of which are discussed below.

In Cripps v. FC of T 99 ATC 2428 (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 rent from three properties. The taxpayer employed a manager and an accountant who 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... 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'....

Application to your circumstances

While you personally perform activities relating to the maintenance of the property, the undertaking of this activity is not sufficient enough to amount to the carrying on of a business. However, the circumstances surrounding the managing and maintenance of the properties can be aligned with the circumstances in Cripps' Case and Case 24.

After considering all of the relative business indicators and objective facts surrounding the case, it is considered that you are not carrying on a business of leasing residential properties.

We acknowledge that you have incurred travel expenses as a result of attending the property; however, this does not cause you to be carrying on a business.

Additionally, you do not meet the criteria of an excluded entity for the purposes of section 26-31 of the ITAA 1997.

Therefore, you are not entitled to claim a deduction for travel expenses incurred in owning your residential rental property.