Most people who own rental properties disclose their rental income and expenses in the rental section of the individual tax return but in some cases, the ATO can treat you as if running your rental property portfolio is actually a business. In that case, you disclose all your income and expenses in the business part of the tax return instead.
Does it, in practice, make any difference?
The answer is yes. If you are in the business of running a rental property portfolio there are some additional tax breaks that are not available to most rental property owners:
- You can claim a deduction for travel costs incurred in visiting your residential investment properties. Examples of such costs include travel for the purposes of collecting rent, visiting a property manager, and organising maintenance and repairs to the property. The government changed the law to prevent rental property owners claiming such costs from 1 July 2017, but not where the expense is incurred in earning business income.
- Similarly, from 1 July 2017, the government changed the law to prevent residential rental property investors from claiming depreciation on assets used to generate rental income where the asset was previously used. This prevents landlords claiming depreciation on assets that are acquired second-hand or that were already installed in a property that was acquired second-hand (in other words, not a new build). Again, this rule does not apply where rental income is earned in the course of carrying on a business. In such cases, depreciation can still be claimed on second-hand assets.
- Those in business can claim an immediate deduction for the cost of capital assets costing up to $30,000 per item (provided your business turnover is less than $50 million). This can be a great tax break for covering the costs of equipping a rental property – but it is only available against business income, so most residential investment property owners do not qualify.
So, how do you qualify as running a business of renting out property? A large part of the answer to that rests on how many rental properties you own and how actively engaged in the management of your portfolio you are. So, the more properties you own and the more closely involved in the day to day management of your properties (as opposed to relying on a letting agent to do if for you), the more likely you are to qualify as being in business.
The ATO has issued a tax Ruling that addresses this question. In that Ruling, the ATO says that the question of whether a business is carried on is a question of fact and depends on the circumstances of each case. Some of the factors that the ATO will take into account include:
- the total number of residential properties that are rented out
- the average number of hours per week spent actively engaged in managing the rental properties
- the skill and expertise exercised in undertaking these activities, and
- whether professional records are kept and maintained in a business-like manner.
The ATO also notes that “generally, it is more difficult for an individual to demonstrate that they are carrying on a business of property investing than it is for a company. 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.”
In practical terms, the ATO has also set out how these factors might be applied to real-life situations in another ruling:
- A couple own two holiday flats in a popular holiday destination which they manage and maintain (including the cleaning and repair of the flats, and financial tasks, such as banking). The ATO says that the scale of the operation is such that no business is being carried on.
- An individual owns 20 residential units that are leased to long- term tenants. The individual manages and maintains the flats on a full- time basis, living on the income generated from the leases. The ATO says that the scale of the operation, together with the element or repetition and purpose, indicate that the individual is carrying on a property investment business and would be entitled to the extra tax breaks.
- An individual owns 10 residential units that are leased to long- term residents and uses the services of an agent to manage the premises. The ATO says that the individual does not carry on a property investment business as they use an agent to manage the properties.
So, for most mum-and-dad investors with one or two investment properties, you won’t be in business and won’t be able to access the extra deductions. But if you own and personally manage many properties, to the extent that the management of your property portfolio takes up most of your working time, you may well have a strong case.
As always when looking at complex areas of tax law like this, it pays to take professional advice, so talk to your tax agent if you think you’ve gone beyond being a property investor and are now in business.