A taxpayer has been mostly unsuccessful before the AAT in challenging the Commissioner’s decision to disallow a variety of deductions relating to rental properties.

The taxpayer, who worked full-time as an industrial chemist, owned rental properties with her husband and had done so for many years. In the income years in question (2003, 2004 and 2005), they owned 9 rental properties. She declared a net rental loss for those years, contending that she carried on a business of letting rental properties. The issues were whether she was carrying on a business of letting rental properties and whether various expenses were deductible.

The AAT firstly decided that the taxpayer was carrying on a business of letting rental properties. Relevant factors were her oversight, and part-management, of the properties, her supervision of the real estate agents appointed to manage the properties, and her intention of making a profit.

Most of the disputed expenses – including car expenses, travel expenses, repair and maintenance costs and the costs of investment courses and seminars – were disallowed, either because the AAT said they lacked the necessary connection with the taxpayer’s income-producing activities or there was insufficient evidence to support the claims.

However, the taxpayer was allowed a deduction for the cost of 3 modules of a course run by the National Investment Institute – “Advanced Renovations for Established Properties”, “Advanced Rental System – Create long term positive gearing through maximised rental” and “Equity Lease Rental System – Create long term positive gearing through maximised rental”. In addition, the AAT said she was entitled to a deduction for a portion of her telephone, computer and other work related expenses. The AAT also allowed a deduction for half the capital works deduction for a rental property jointly owned with her husband. The property was built by refinancing a loan secured by a mortgage over the taxpayer’s and her husband’s home. The AAT decided that the taxpayer could deduct 25% of the interest.

Finally, the AAT upheld the Commissioner’s decision to impose administrative penalties of 25% for failing to take reasonable care.

(AAT Case [2014] AATA 9, Re VPFD and FCT, AAT, Ettinger SM, Ref: 2012/2357-2359, 10 January 2014.)

[LTN 7, 13/1/14]