The detailed guide to when you can and can’t claim travel deductions for your property
Travel expenses relating to a residential investment property are no longer deductible. The change was announced in the 2017 Budget and came into effect from 1 July 2017 but many affected taxpayers are only now – as they come to prepare their tax return for the year ended 30 June 2018 – getting to grips with the implications of the change.
Every year, thousands of property investors use H&R Block to lodge their tax returns and that means that we tend to be first in the queue to hear taxpayer feedback on changes like this. And so far, our clients are telling us that they don’t like this change at all.
What can no longer be claimed?
From 1 July 2017, any travel undertaken by residential rental property owners associated with income earned from their property will no longer be claimable. This could include costs incurred:
- To inspect the property
- Collect rent from tenants
- Prepare the property for incoming tenants
- Maintain and/or undertake repairs to the property or improve the property
As well as costs of visiting the property itself, the new restriction also catches journeys associated with the property, such as those to body corporate meetings, to a real estate agent to discuss the property or to a hardware store to buy supplies for a repair.
In a double blow to investors, the travel expenditure also cannot be included in the cost base of the property for capital gains tax purposes.
An example of the type of abuse the ban was intended to stop were situations where taxpayers in, say, Victoria, were visiting their holiday property in, say, Queensland, spending a short amount of time at the property whilst combining it with a holiday in the sun – and then claiming a tax deduction for the whole cost. The problem is that abuses like that were quite rare; the vast majority of affected taxpayers are undertaking day to day travel over short distances to undertake essential but mundane tasks like fixing a leaky toilet or dealing with noisy neighbours. Taxpayers are unhappy because those journeys still need to be undertaken but tax deductions can no longer be claimed for the journey.
Are there any exceptions to the ban?
There are situations where taxpayers can still claim a deduction for travel costs but they are very limited in scope:
- Claims can still be made for journeys undertaken before the new rules were introduced. So claims can still be made for costs incurred in 2016-17 and earlier years for residential rental properties. In practice, that exemption will largely apply only to those with prior year tax returns still outstanding.
- Claims can still legitimately be made for travel costs if you own a commercial rental property rather than a residential rental property. This means that if you own a shop, factory, warehouse or office, you are not affected by the new rules for travel undertaken in relation to that property
- Travel can still be claimed if the property is owned by an “excluded” entity, such as a company, super fund (but not an SMSF) or a large unit trust. Only individual property owners (and SMSFs owning properties) are caught.
- The rules don’t apply when carrying on a rental property business.
When is a property investor carrying on a business?
If you’re looking to take advantage of the last bullet point above, be careful. Many clients have asked us if they could be regarded as running a rental property business and the answer is almost always no. The ATO looks at this question on a case by case basis based on the facts.
What they say is that an individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number or properties or a block of apartments, that may indicate the existence of a business.
The ATO’s Rental Property guide gives an example where a taxpayer managing 26 rental properties was considered to be ‘running a rental property business’, demonstrated by:
- The significant size and scale of the rental property activity
- Number of hours spent on the activity by the taxpayer (25 per week on average, in this example, so it was virtually a full time occupation)
- Extensive personal involvement in the activity and
- The businesslike manner in which the activity was planned, organised and carried on.
Is a bed and breakfast a business?
Some people who own holiday homes which are let to the public have tried to argue that they are really running a bed and breakfast business (and hence can still claim the travel deductions).
The first thing to say in relation to that point is that a B&B can be a business for these purposes.
This example is taken from the ATO’s own guidelines:
Jacob operates a business of leasing holiday flats located in Caloundra. He undertakes various tasks such as cleaning, laundry, greeting guests and topping up provisions on a daily basis. He used his car to travel between the flats and his home (where he keeps his equipment and stock) and uses a logbook to record and calculate travel expenditure.
The holiday flats are residential premises for residential accommodation, the travel expenditure is incurred in the course of carrying out a business for the purpose of producing assessable income. The travel expenditure is deductible.
That doesn’t however mean that every holiday home is a B&B. Unless you meet the fairly strict requirements illustrated in the above example (which will not typically be the case in most holiday let situations), you won’t be regarded as running a B&B and won’t meet the “business” test outlined above, meaning you won’t be exempted from the travel ban.
If you need help in understanding how the new rules might apply to you, the best place to start is by discussing the issue with a tax agent like H&R Block.
Mark Chapman is the Director of Tax Communications at H&R Block.