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.

FJM 12.8.18

[ATO website: LCR 2018/7; LTN 195, 10/10/18; Tax Month – October 2018]

 

CPD questions (answers available)

  1. Is this ‘Law Companion Guide’ about the operation of the new s26-31 of the ITAA97?
  2. Does this section prohibit deduction for certain travel deductions relating to earning assessable income from renting residential premises?
  3. Does this prohibition apply to companies?
  4. Does this prohibition apply to SMSFs?
  5. Does this prohibition apply to this type of expenditure incurred in carrying on a business?
  6. Does this ruling concede that it’s easier for a company to be carrying on a business than an individual?

[Answers:1.yes;2.yes;3.no;4.yes;5.no;6.yes]

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