The ATO has identified 26,000 taxpayers who have claimed deductions during tax time 2018 for travel to their investment residential rental properties, despite recent changes to the tax laws that disallow such claims. From 1 July 2017, investors cannot claim travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property as deductions, subject to certain exceptions: s 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997).
Rental property investors should check if their situation matches one of the exceptions to this change before they lodge any claim for rental travel. An exclusion does apply for this restriction on travel expenses if the expenditure is necessarily incurred in carrying on a business for income-producing purposes (including a rental property business), or if it is incurred by an "excluded entity", namely:
- a corporate tax entity;
- a superannuation fund that is not a self managed superannuation fund (an SMSF);
- an approved deposit fund (ADF) or a pooled superannuation trust (PST);
- a public unit trust;
- a managed investment trust; or
- a unit trust or partnership.
If the travel expenditure is incurred by a unit trust or partnership, it will only be deductible if all members of the trust or partnership are excluded entities. See also the ATO website at www.ato.gov.au/rentaltravel and refer to Law Companion Ruling LCR 2018/7 Residential premises deductions: travel expenditure relating to rental investment properties.
Note that the restriction only applies to travel expenses in relation to a "residential rental property". As such, it is still possible to claim a deduction for travel expenses in relation to commercial property that falls outside the definition of "residential premises" used as residential accommodation. Of course, the other deduction requirements in s 8-1 of ITAA 1997 must still be satisfied.
The ATO now uses sophisticated data analytics to assess a range of deductions and claims. Taxpayers must follow three golden rules when claiming a deduction:
- the taxpayer must have spent the money (and not been reimbursed);
- the claim must be directly related to earning the taxpayer's income; and
- they must keep records to prove it.