Private ruling: Income tax - deductions - rental property expenses - travel expenses?
Date of advice: 24 April 2018
Published: August 2018
Ruling period: Year ended 30 June 20xx | Year ended 30 June 20xx | Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you entitled to claim vehicle expenses for managing my rental properties? | A1: No

Relevant facts and circumstances: You are the sole owner of X rental properties in which you manage and undertake a variety of activities that require you to travel reasonable distances. You use your motor vehicle solely for the purpose of your rental properties. You travel an average xxx Kilometres / week for rental property activities. All properties are rented at market value and are usually rented on long term leases. X of your properties had no vacancy from x July 20xx to 20xx. ● Property x was vacant prior to 1 July 20XX due to tenant changeover. The property was tenanted from xx July 20XX to xx January 20xx and tenanted again on xx February 20xx. ● Property x was vacant from xx August 20xx to xx January 20xx. You drive weekly to businesses and organisations to carry out activities such as purchases, obtain quotes, pay accounts, photocopy receipts etc. You transport large cleaning items, vacuum, brooms and buckets when perform cleaning duties. You consider you act in the position of a property manager maintaining your properties. You have no other employment. You are a member of the Property Owners Association and read publications and attend seminars held by the association. You read publications issued by Real Estate agencies. You investigate rental property marketing on realestate.com and domain.com and confer with your letting agents to verify your research. You have a bachelor of commerce degree. You opened a business bank account on xx February 20xx. You provided a copy of your Business Plan dated xx March xxxx. You were away from xx September 20xx to xx September 20xx and there were no rental property activities recorded. The average hours spent on your rental property activities is 13 hours per week. You added an additional 2 hours per week for reading material and researching the property market. The activities include: ● Engage letting agent to conduct rental history checks and advertise properties ● Arrange and attend property inspections with prospective tenants ● Complete Exit and Entry Condition Reports including Bond lodgement form to RTA ● Conduct internal and external property checks ● Clean and organise repairs and maintenance of property when tenants vacate, including clearing junk mail from letterbox and taking garbage bins out and in from the footpath ● Develop good relationships with neighbours to consult with if there are any issues ● Contact energy providers to arrange a reading when tenants vacate a property ● On call for tenants to report damage or maintenance issues ● Contact tradespeople to organise repairs and maintenance ● Pay accounts promptly by depositing funds into their nominated bank account ● Pay rates at post office ● You investigate appropriate products and items for your property eg new floor coverings, kitchen/bathroom cupboards ● Once a month you write rent receipts and deliver rent receipts to tenant ● You photocopy all receipts and file them into the respective tax folders in your filing cabinet

Relevant legislative provisions: Income Tax Assessment Act 1997 section 26-31 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Detailed Reasoning - Travel related to use of residential premises as residential accommodation: Section 26-31(1) states you cannot deduct a loss or outgoing you incur after 1 July 2017, insofar as it is related to travel, if it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodated and it is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Section 26-32(2) states the restriction will not apply if the expenditure is necessarily incurred by a corporate tax entity, a superannuation plan that is not a self-managed superannuation fund, a public unit trust or a managed investment trust (excluded entities). Therefore, you are no longer able to claim deductions for the cost of travel you incur relating to residential rental properties unless you are carrying on a business of property investing or you are an excluded entity. | Detailed Reasoning - Carry on a Business?: Taxation Ruling TR 97/11 provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: ● 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 regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit ● the size, scale and permanency of the activity ● whether the activity is better described as a hobby, a form of recreation or sporting activity. These indicators must be considered in combination and as a whole and whether a business is being carried on depends on the large or general impression gained from looking at all the indicators, and whether these factors provide the operations with a commercial flavour. The weighting to be given to each indicator may vary from case to case. Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business. Whether the letting of property activities amount to the carrying on of a business will depend on the circumstances of each case. Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual. A person, who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. If rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business. The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below. In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 ( 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 rents from three properties. The taxpayer employed a manager and an accountant - he 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, &c., 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’.... In 15 CTBR (OS) Case 26 , ( Case 26 ) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats. On the other hand, Case G10 75 ATC 33 ( Case G10 ), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer’s task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. | Detailed Reasoning - Applying the relevant cases and indicators to your circumstances: In your situation, you are renting out xx rental properties. You use a letting agent to advertise and screen tenants. You arrange with prospective tenants to view properties and perform inspections. You use tradespeople to perform repairs and maintenance. Your x properties are positively geared and this profit is generated from your rental income. Your business plan indicates that your business is the renting of small, affordable residential property and management of those properties. It is noted that you carry out cleaning of the properties when they are vacated and whilst they are vacant awaiting tenancy. You also arrange the services of tradespeople for repairs and maintenance. Those activities are required for the purpose of maintaining a property in good state. You have x properties which is more than in Case 24 , however less than in Case 26 and Cripps’ Case . Your income is from the rental activity which is investment in nature and you are not providing any additional income generating services. You claim that you spend in average 15 hours per week on the rental properties in relation to the administration and repairs/maintenance activities. It is noted that you use tradespersons to assist with repairs and a Real Estate agent to do the potential new tenants screening. The level of repetition and regularity and the scale of your activities related to your rental property is not as great as that noted in Case G10 where the taxpayers rented out short term holiday units and not as great as the Case 26 where despite the management and maintenance activities undertaken, the property owners were not considered to be carrying on a business of letting properties. The size and scale of your rental property activities has not changed since 20xx. From your property tax returns it is noted that your rental income has not varied significantly over the past six years. The profitability of the rental properties over the past six years trends with once every three years there is a much higher profit which decreasing over the next two years. However, the result of the profit is due to an increase in your expenses rather than an increase in activities with the intention to increase your profit. After weighing up the relative business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner’s view that your rental property activities are better described as leasing residential properties to receive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the properties. You can change from conducting an activity as an investment to that of being in business and vice-versa over time, as your level of activity changes. You should evaluate your level of activity on a regular basis to see whether you are conducting an investment or carrying on a business. However, it is viewed that your activities in the income year covered by this private ruling support that while you own XX rental properties you are a passive investor. Accordingly, it is the Commissioner’s view that you are not carrying on a business of letting rental properties.