The new landscape for residential rental properties

The Treasury has released draft law for the two measures announced in the Federal Budget in May this year in relation to denying tax deductions for travel relating to residential rental properties and also in relation to the removal of access to depreciation deductions for pre-existing depreciable assets.

As with many changes to tax law, there is some increased certainty, and there is some increased uncertainty. This article looks at the issues arising from the draft denying the travel expenses.

Travel expenses

The denial of deductions for travel expenses applies to individuals, discretionary trusts, smaller unit trusts, and SMSFs only. Companies, large super funds and widely held trusts are specifically excluded from the new rules. Partnerships are not specifically excluded, and so the first uncertainty is how the law will apply to a partnership which has one of the excluded entity types as a partner.

The denial of deduction applies to residential premises. This phrase is defined in the tax law and links into the same definition used elsewhere in the income tax law and in the GST Act and so there is some certainty here.

However proposed section 26-31 ITAA 1997 denies a deduction ‘… insofar as it is attributable to travel…”. This phrase is not defined and thus the second uncertainty arises. The draft explanatory memoranda lists out examples; however these are not in the actual law and so the ATO might (say in a ruling or determination on the subject) come up with a different list and the Courts may themselves come up with yet another list. Travel could reasonably be expected to include car expenses when visiting a real estate agent across town or a few suburbs away as easily as it could include an airfare to a different town or city. It may well also include any meals or accommodation costs incurred whilst travelling. So a landlord driving to their rental property to mow the lawns once a fortnight will be non-deductible travel.

The draft law and explanatory memoranda is silent on whether costs whilst staying at the rental property (or nearby) are deductible whilst not travelling but whilst undertaking other tasks. Take the example of a landlord who owns a residential rental property in an area subject to cyclones and has to travel there to undertake urgent repairs in order to mitigate the storm damage and put the property back towards being able to be let (a rental property in fire-prone areas would also be a typical example). Just after the cyclone the likelihood of them finding a tradesperson with the spare time to do the work for them is clearly going to be low, as there will be many home owners similarly affected. So the home owner is faced with the choice of leaving their property to suffer further damage whilst they wait for a hired tradesperson to have capacity to help or the owner themselves can go there and do what they can. The travel to get there is clearly not deductible; the draft law doesn’t really answer the question of whether the costs of the owner being there whilst they repair the property are deductible. Materials would presumably be deductible (as they clearly aren’t travel costs), but what about the meals and accommodation for the owner – they may well be travelling because they are away from home. They are certainly not on holiday!

A further uncertainty is that the travel deductions are only non-deductible if the taxpayer is not carrying on a rental business. This may well lead to an increase in private binding ruling applications about how many properties are required, or how much involvement is needed for the activity to be a business, so perhaps Treasury is making sure that the ATO’s PBR staff have plenty of work to do.

The last point to note is that all the non-deductible expenses are specifically not able to be included in the CGT cost base of the relevant rental property, so the new rules completely remove any tax benefit (and there is no mere deferral until the property is sold).

So we now have some idea of how the new travel rules will work; we also can see where the new areas of friction between the ATO and taxpayers will be.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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