The ATO has identified some 26,000 taxpayers who have claimed deductions on their 2018 tax returns for travel to their investment residential rental properties, despite recent changes to the law.
From 1 July 2017 most travel expenses relating to a “residential” investment property are no longer deductible. Travel expenses include car, airfares, meals and accommodation that relate to rental property inspection, maintenance, rent collection, attending body corporate meetings etc.
The travel expenditure also cannot be included in the cost base for calculating a capital gain or capital loss upon sale of the property.
A residential 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.
A deduction continues to be allowed for the cost of travel expenses incurred to inspect or maintain rental properties or to collect rent where the expenses were incurred:
- for commercial rental properties
- by excluded entities
- when carrying on a rental property business.
Carrying on a Rental Property Business
Generally, owning one or several rental properties will not be considered to be in the business of rental properties.
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.
Example: An individual with residential investment property in 2017–2018
Joshua rented out his residential rental property during the 2017–2018 year. He travelled to the property to repair damages caused by tenants during the year. As the investment is a residential property, Joshua cannot claim the travel expense.
Excluded entities
An excluded entity is a corporate tax entity, superannuation plan that is not a self-managed superannuation fund, public unit trust, managed investment trust, unit trust or a partnership, all the members of which are entities of a type listed above.
Example: An excluded entity in 2017–2018
ABC Pty Ltd incurred travel expenses in 2017–2018 when the property manager was tasked with inspecting a residential property investment that is currently tenanted. ABC Pty Ltd is a corporate tax entity and can claim a deduction for rental travel costs.
