From 1 July 2017, non-business travel costs incurred by individuals, self managed super funds (SMSFs) and "private" trusts and partnerships in relation to residential rental properties are not deductible (s 26-31 of the Income Tax Assessment Act 1997). Such expenditure is also excluded from forming part of the cost base or reduced cost base of a CGT asset.
Law Companion Ruling LCR 2018/7, issued by the ATO on 10 October 2018, provides guidance on the following matters:
- the meaning of the term "residential premises" in s 26-31;
- the meaning of "carrying on a business" for the purposes of the business exclusion in s 26-31(1)(b), and
- the application of s 26-31 to travel expenditure that serves more than one purpose.
LCR 2018/7 applies from 1 July 2017. It finalises Draft LCR 2018/D2 and contains the same views as the draft.
Section 26-31 of the ITAA 1997 refers to the "use of residential premises as residential accommodation". The expression "residential premises" takes its meaning from the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), which defines it as land or a building that is occupied, or is intended to be and is capable of being occupied, as a residence or for residential accommodation. The ATO's views on what constitutes "residential premises" for GST purposes are set out in GST Ruling GSTR 2012/5.
LCR 2018/7 mirrors the GST ruling by providing that:
- the premises must be fit for human habitation, providing shelter and basic living facilities;
- the actual use of the premises as a residence or for residential accommodation is relevant to satisfying the first limb of the definition (concerning actual occupation);
- the second limb of the definition (concerning intended occupation) refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation;
- the term of occupation or intended occupation is not determinative; and
- the premises may be in any of a number of forms, including single rooms or suites of rooms within larger premises.
A deduction is not denied under s 26-31 for travel expenditure necessarily incurred in carrying on a business. This exclusion covers taxpayers carrying on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. The ATO may take the following matters into account in determining whether a business of letting residential properties is being carried out:
- the number of residential properties being rented out;
- the hours per week spent actively engaged in managing the properties;
- the skill and expertise exercised in undertaking these activities; and
- whether professional records are kept and maintained in a business-like manner.
It is generally harder for individuals to demonstrate that they are carrying on a business of property investing than it is for companies (which are specifically exempt from s 26-31 anyway). In the ATO's view, "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".
The expenditure made non-deductible by s 26-31 is a loss or outgoing "insofar as it is related to travel". The ATO says that the use of the word "insofar" means that an apportionment is required if there are mixed income-producing purposes for the travel costs. If a single outlay of travel expenditure is incurred partly for producing income from the use of residential premises as residential accommodation and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to fairly and reasonably assess how much of the amount relates to each purpose. Factors to take into account include floor-area ratio, rental income and travel time spent attending to each income-producing purpose.