On Wed 10.10.2018, the ATO issued Law Companion Ruling LCR 2018/7 on non-business travel costs incurred in relation to residential rental properties.
From 1 July 2017, individuals, SMSFs and “private” trusts and partnerships can no longer deduct such costs (s 26-31 ITAA 1997). The ruling provides guidance on the meaning of key terms in s 26-31, and on apportioning travel expenses that serve mixed income-producing purposes.
The new s26-31 is in the following terms:
26-31(1) You cannot deduct under this Act a loss or outgoing you incur, insofar as it is related to travel, if:
(a) it is incurred in gaining or producing your assessable income from the use of *residential premises as residential accommodation; and
(b) it is not necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Subsection (2) then excludes a number of types of taxpayer from the operation of this prohibition on claiming deductions: ‘corporate tax entities’, superannuation plans (however, SMSF’s are excluded from the exclusion and are subject to the ban); ‘managed investment trusts’; ‘public unit trusts’; ‘unit holders’ or ‘partnerships’ comprising these entities.
A deduction is not denied under s 26-31 for travel expenditure necessarily incurred in carrying on a business.
- The ATO says that 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 adds that it is harder for individuals to demonstrate they are carrying on a business of property investing than it is for companies (which are 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”. If a single outlay of travel expenditure is incurred partly for producing rental income and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to make a fair and reasonable assessment of the extent to which the amount relates to each purpose.
CPD questions (answers available)
- Is this ‘Law Companion Guide’ about the operation of the new s26-31 of the ITAA97?
- Does this section prohibit deduction for certain travel deductions relating to earning assessable income from renting residential premises?
- Does this prohibition apply to companies?
- Does this prohibition apply to SMSFs?
- Does this prohibition apply to this type of expenditure incurred in carrying on a business?
- Does this ruling concede that it’s easier for a company to be carrying on a business than an individual?