Tax Tip 417: Travel in Relation to Residential Property could be Deductible

Discussion in 'Accounting & Tax' started by Terry_w, 8th Jul, 2022.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    In Tax Tip 211 I wrote about travel not being deductible for residential property in most situations however it can still be deductible in some instances, and I want to point these out.


    Firstly, it can be deductible for a company that holds residential property, s 26-31(2)(a) if that company is not acting as trustee.

    Secondly, it can be deductible for a unit trust if all of the units of that trust are held by a company that is not acting as trustee, s 26-31(2)(e) ITA97

    Thirdly, it can be deductible where the residential premises are not being used as residential accommodation.

    The definition of ‘Residential premises’ is taken from the GST Act definition which can be found at s 195-1 GST Act 1999:

    "residential premises" means land or a building that:

    (a) is occupied as a residence or for residential accommodation; or

    (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

    Fourthly, where the travel Is incurred in carrying on a business it could also be deductible.


    Example

    Homer is a professional property investor – yet he owns all properties in his personal name. He has a commercial property which is in QLD and which he flies up to inspect. This travel could be deductible as it doesn’t relate to residential property.

    He owns a house in Sydney which is let to a doctor who uses it as a doctor’s surgery. Travel to this house could be deductible too as it is residential premises but is not being used as residential accommodation (further details might be needed to determine this).

    He also owns an Airbnb property which he drives to and changes the sheets on, after every 5th customer. This is a business that he is conducting so he could claim the travel for this.

    Homer also owns and self manages 10 other properties around NSW and thinks he might be conducting a business of rental property business and if so the travel to any of his properties could be deductible.


    Tax Tip 211: Deductions for Travel Expenses Related to Property Tax Tip 211: Deductions for Travel Expenses Related to Property
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    It is the ATO’s view is that it is quite rare that individuals who own standalone residential rental properties are carrying on a business, even where they own multiple standalone properties.
    In the past year or so there have been some developments in the area of "property business"to consider.. However despite the decision care shuld be taken. It may miselad some into thinking the ato has asofter approach.

    Allen v FCT[2021] AATA 2768. The AAT found a taxpayer owning 9 rental properties was actively involved in the management of these and on that basis there was a property business. However the decision is somewhat limited and further understanding of the older views contained in IT Ruling 2423 (scale of operations), SMSFR 2009/1 (20 residential units), The rental properties publcation (26 rental properies), The decision in Cripps case (16 properties) and YPFD v FCT (9) and well as the earlier decison in Shields case on features of a property business. In the Allen decision the AAT accept the taxpayer was very actively involved with a lot of evidence , that the ATO disputed. Allens case included:
    • taxpayer involvement in selection, interview of tennats
    • Admin duties incl paying all costs and facilitatiing repair etc (not the PM)
    • Lease arrangements
    • Undertakeing repairs and captal improvements personally and in a manner that permitted rents to be enhanced substantially
    • record keeping
    • Taxpayer extensively relied on rents for all his income, not employment
    • taxpayer demonstrated use of profits to acquire more property and conduct capital improvements to enahnce portfolio over a long period as a form of plan
    ATO disputed profit making as there was not even a record of this profit making. Just tax compliance for taxable income.
    AAT did favour arguement made by the taxpayer concerning low gearing (37%) which is consistent with profit making. And the AAT found against the ATO view that developing and enhancing was not a busienss activity but related to the capital asset.

    Care must be taken with this as the ATO position is evident in the AAT action. The ATO will aggresively oppose claims for operating a property business and look at factors well beyond a number of properties. The ATO is particularly oppositional to short stay property as a business eg Private ruling 1051786522586, 1051711297361. The ATO view now also considers services BEYOND the supply of the accomodation and its things, Additional services MUST be provided for additional charges. ie the level of servces provided to guests must be more than the accomodation. Supply of breakfast, game consoles, toiletries etc is a part of the accomodation offer.

    A property business will not report income on a rental schedule. Further the legal ownership principle will be set aside. eg Dave and Mabel are spouses and co-own 40 apartments. Some are owned by Fred, Some by Mabel and some in various % as Tenants In Common. The property business view would see ALL property in a Partnership with its own TFN and ABN. The share of profits and losses would be 50/50 without reference to title. Disposal of property may also have other tax consequences but where property is held long term the CGT asset basis may be OK ie "mere realisation". However the small business CGT concessional may not apply since net assets may fail the requisite $6m net asset test.
     
    Last edited: 8th Jul, 2022
  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Where would you find 40 sub-$150k properties to come in under $6M (even if they were suburban bedsits or boarding house rooms)?
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes good points. It is difficult to be classed as a business but I think there are 2 distinctions.
    a) is 'being in the business of property'
    b) but slightly different is operating a short term letting business

    The first one would be hard to qualify for but the second one easier - perhaps one airbnb wouldn't be enough though.

    But, a side issue, where a company holds property for airbnb it could be conducting a business under TR 2019/1. That could lead to a whole new set of other benefits. MikeA pointed this out a while back
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I shoudl also point out that this side track has no bearing on the deductibility of travel for a company that owns residential property. it can claim travel whether it is conducting a business or not.
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The specific statements (ie would) by the ATO in para 25/29 can seem very specific but further para to that ruling seems to also detract from a certain view. eg Para 53+
    Binding private ruling time...I believe this common law view is why Companies were excluded from the tax law changes re travel and also depreciation etc. Too contentious for appeals

    The short stay seems to have developed a strong ATO view based on case decisions that more than mere accomodation must produce income. So additional income should arise eg a bed and breakfast that also provides paid meals, transport, commissions of tours, etc

    BPR #1 : https://www.ato.gov.au/law/view/document?docid=EV/1051786522586
    • one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property.
    • scale of operations is an important factor to consider in deciding if an individual is carrying on a business of letting property. Scale of operations refers to the number of properties, rather than the frequency of tenancy
    BPR #2 https://www.ato.gov.au/law/view/view.htm?docid=EV/1051711297361&PiT=99991231235958

    • whether your activities amount to the carrying on of a business was dependant on the level of services provided to the visitors in addition to the accommodation, and if those services added value to the accommodation activities
    • whether your activities amount to the carrying on of a business was dependant on the level of services provided to the visitors in addition to the accommodation, and if those services added value to the accommodation activities
    I do believe there is a way SOME stort stay owners could reengineer their offer and possibly comply. This could include selling things like food delivery, in house meals, tours and more. Renting bikes, surf gear etc..
     
  7. thatbum

    thatbum Well-Known Member

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    Damn the ATO was aggressive.

    Looking at the key facts in that case, I would have thought the taxpayer had a pretty convincing case to distinguish themselves from just another property investor with a big portfolio.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Defend first and then accept the AAT. I believe there is a significant public interest issue to avoid it appearing like a open slather view. Imagine if every owner of a handful of short stays could classify as a business ? Operating a business from home - ownership costs ? Travel is least of the issues.

    I do wonder if a group of investors could undertake a partnership for the business activity though. Say ten investors who have a commonly marketed pool of thirty apartaments ? saw this in Vegas with one I was seriously considering but missed. Each owner of the penthouses chooses to add it to a private pool. The pool is a business. Vdara : Secret Suites at Vdara | Las Vegas, 2 bedrooms suites in Las Vegas Strip and very exclsuive. Yields are really really high. ONLY strip penthouses that are privately owned.

    What about the concerns if a couple with a smsf operated a few properties as short stay in a commercial manner ? A load of super issues in that one.
     
    Last edited: 8th Jul, 2022
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Here is a list of my tips in relation to claiming travel expenses, I just recorded a podcast episode on this topic which should be out in a couple of weeks

    Tax Tip 211: Deductions for Travel Expenses Related to Property Tax Tip 211: Deductions for Travel Expenses Related to Property

    Tax Tip 224: Can you claim Travel Relating to Property off CGT? Tax Tip 224: Can you claim Travel Relating to Property off CGT?

    Tax Tip 370: Deductions for Travel related to Investment property Tax Tip 370: Deductions for Travel related to Investment property

    Tax Tip 417: Travel in Relation to Residential Property could be Deductible Tax Tip 417: Travel in Relation to Residential Property could be Deductible