Tax Tip 211: Deductions for Travel Expenses Related to Property

In the good old days people used to buy a property up at the gold coast and then fly up there to inspect it over a few days each year and claim the trip as a deduction. They probably made a taxpayer subsidised holiday out of it too.

This is generally no longer possible.

Section 26-31 of ITAA97 has been introduced to prevent deductions for travel relating to property in the following circumstances:

· the property is residential

· The property is used as a resident accommodation, and

· It the expense is not incurred in relation to carrying on a business

This applies to individuals, trustees and SMSFs but not to exempt entities such as company owners of property.


So, when could travel be potentially claimed?

· If it relates to a property that is commercial or non-residential, or

· If it relates to a residential property that is used for other than residential accommodation, or

· If the owner of the property is in the business of property, or

· If the property is owned by a company, other than as trustee.

 

The ATO have issued a warning that they are seeing 9 of 10 rental property schedules with incorrect deduction claims including travel. This year the number of property audits will be doubled.

 

Travel deductions must be an enormous red flag for the ATO nowadays (assuming investment-related travel is reported separately to work-related travel when doing a return?). Hard to imagine people would try to claim it, least of all those using tax agents.

 

I can only imagine they will try to use the excuse 'I didn't know' - both tax agents and taxpayers

 

There are obviously people who abused the travel expenses claim but I am not one of them. If I need to do some maintenance such as painting, or sealing the veranda decking on one of my residential rental investment properties then it is a 120 km round trip each visit. It may take several visits depending on the amount of work required. I find it totally unacceptable that I cannot claim the travel costs nor my time in doing the work.
If I were to pay a painter to do this then they of course would include within their bill to me the costs of using their vehicle and their labour - yet I am not allowed to claim these exact same expenses !
So how about this as a solution? I create an sole trader ABN with a business name (JB Maintenance?) that does this work (painting in this example). I do the painting since I am the owner of JB Maintenance and I invoice myself for the work. JB Maintenance's invoice would be sensible (not over inflated) and include within the total $ an amount for travel costs and labour costs - just as any contract painter would do.
I pay JB Maintenance and at the end of the tax year JB Maintenance's net income gets added to my personal tax return since I'm the sole trader. The tax deductions for the property include the invoiced amount from JB Maintenance as well as rates, agent fees, etc.
I'm sure that this would give me a better end result for the $ return on the property.
Are there any problems with this approach? Will the ATO be happy with it?

 

No

2 reasons
a) legally you could not contract with yourself, and
b) the income would cancel out the benefit
e.g you charge yourself $1000. You claim it as a deduction, but you have earned $1000 in income.

 

Okay, looks like a bad idea then.
Can you suggest a solution?

 

A spouse or a company perhaps? But consider the costs and admin

 

Yes, my spouse could use her current sole trader ABN and that ABN could invoice me for work done on properties in my name only. Am I correct in thinking that it is not acceptable for her to invoice us for properties owned in joint names?

 

Yes.

You should also get advice on other tax aspects such as the anti-avoidance measures.

 

Okay, thanks for the tips Terry_w.

 

Tips arent advice but a veiled suggestion seems inferred imo it sounds like a scheme. A sole trader abn likely has an relevant enterprise activity and attempts to alienate a tax benefit could pose a concern since its likely its not same enterprise and spouse has no deductible nexus to her income

 

What about a block or 4 or more units? I believe banks consider any property with 4 or more units as commercial. Would the ATO consider this the same way?

 

What the bank thinks has no effect on taxation. You would need to be in 'business' which is generally not possible where you merely own property.

 

If people are living in the units then it would be residential .
If the block was a hotel or motel block and you were charging the tenant GST then yes it would be commercial.

 

Perhaps people should spent the time on making more profit than looking for a loophole in the travel deductibility
It is likely to be more profitable !

 

Not necessarily - tax is different to planning laws.

 

Like long term residence Terry ?
Like Howard Hughes who lived in the Beverly hills hotel plus many others ?
The wealthy and aging Hughes, accompanied by his entourage of personal aides, began moving from one hotel to another, always taking up residence in the top floor penthouse. In the last ten years of his life, 1966 to 1976, Hughes lived in hotels in many cities—including Beverly Hills, Boston, Las Vegas, Nassau, Freeport, Vancouver,[112] London

 

Someone could be in the business of holding residential properties. Doing their own management, taking an active role. etc
It would probably take a lot of properties to meet the requirements, but it is possible.

Another example is developers buying a residential property to knockdown, build and sell.

 

The ATO dont have a precise number of properties but has used examples that are 35+. In addition, the ATO consider that to derive income from a property business requires substantial reliance on the rental income.

I have always recommended anyone who may meet the test should seek a binding private ruling. Most requests are refused on this issue as the taxpayer still has other employment income or lacks the required numbers of properties.

A property business can also work to a taxpayers detriment. Eg Peter & Lois Griffin own 20 properties. Lois only owns 5. Peter owns 15. They also have 12 trusts that each own a property. Peter wins Powerball and quits work and puts 10 more into 10 new trusts and repays all the debt on the 20 he / Lois own. Peter and Lois may now have a property business. Their tax adviser suggests a private ruling to confirm this view. Peter and Lois may be considered to each own every property 50/50 - even those in the trusts. However this implied change of beneficial ownership doesnt impact land tax. Just income tax and CGT. eg Lois sells one property. Both she and Peter will have a CGT event and share 50% each in the net rent for the year. They would also report the income as Partnership income at Item 13. They may be entitled to some small business concessions such as claiming home office occupancy costs for their home office as well as a offsite rented office, paying their child Stewie (Meg and Chris are not competent to work) including super. Due to the value of assets no small business CGT concessions are available.