Are you entitled to a deduction for the travel expenses incurred in relation to your short-term and long-term rental properties?
No. This ruling applies for the following period : Year ending 30 June 20YY The scheme commenced on: 1 July 20YY
You have been letting rental properties. You have 3 rental properties. One propertyis your main residence with a separate self-contained area of the home for short-term accommodation as an Airbnb to generate income. The remaining 2 properties, property A and B are considered by you as long-term rentals. Property A and B were originally purchased with the intention of generating income from your rental activity. You are wanting to claim a deduction for your travel costs associated with your properties. You derived income from your short-term and long-term rental properties activity in the relevant income year which totalled approximately 80% of your total income. You did not borrow any funds to purchase the properties. Short-term rental accommodation You are the owner of the following property, and you consider it to be a short-term rental: Table 1: property address, ownership and rental date Property address Ownership Date rented Residence, consisting of Airbnb (Airbnb) 100% Since purchased The Airbnb property is used exclusively for short-term accommodation purposes and not utilised for any private use, the property has not been rented out to family or friends.
You manage the Airbnb property and advertise the property through the Airbnb - short-term accommodation platform. You determine the accommodation rates based on similar properties in the area. Guests pay for their accommodation at time of booking via the Airbnb booking platform. The booking platform deducts their commissions before transferring the payment into your personal bank account. The property is available for booking 365 days of the year. The average length of stay is 3-4weeks. The following amenities are provided at no extra cost to the guests: • Basic cooking utensils • Condiments, milk, cooking oil • Washing machine, ironing board and washing liquid • Linen is provided clean at the start of stay • Cleaning during the guests stay is their responsibility. Each unit is only cleaned when guests have checked out and when new guests are expected to check-in.
As the property manager and owner, you are the point of contact for guests. As part of the reservation process, all guests are given your direct and dedicated email and phone contact details. Guests can also make contact using the relevant Airbnb booking platform email system. You undertake the following activities in regards of the Airbnb property: • Advertising and marketing of accommodation • Reservations and bookings of accommodation & dispute resolution through Airbnb • Pricing of accommodation • Cleaning upon guests' departure and guest check-in • Conduct all maintenance and repairs where a qualified tradesperson is not required. The number of hours you spend per week on the above activities is estimated to be on average less than 2 hours per week. Long-term rental accommodation You are the owner property A and B and you consider them to be long-term rentals. Table 2: long-term rentals Property address Ownership Date rented Unit 1 property A 100% Since purchased Unit 2 property A 100% Since purchased Unit 3 property A 100% Since purchased Unit 1 property B 100% Since purchased Unit 2 property B
100% Since purchased All properties have been rented and have been deriving income since their acquisition. You engage the services of property managers at a real estate to manage the long-term properties. The length of the tenancy leases varies but they are typically 6 to 12 months each depending on the individual circumstances. The long-term properties have not been used for personal use and have not been rented to friends or family and have never been vacant for long periods of time. For the long-term rental properties that are managed by the real estate agents, their role is to oversee the management and maintenance of the property and includes tasks such as: • Advertising of the property on their website and real estate sites such as domain.com.au when a tenant vacates the property. • Lease preparation • Tenant appraisal • Co-ordinating emergency repairs • Monthly income statements. • Collection of rent and distribution of rent to you • Inspections • Provide 6 monthly inspection reports to you
For two of the leases for the long-term rentals, although they are still managed by real estate agents two of the tenants contact you directly when repairs or maintenance is required and the other three contact the real estate agents. You undertake all repairs and maintenance for the long-term rental properties with the exception of where a qualified tradesperson is required such as an electrician and you estimate you spend less than 5 hours per week on average conducting these duties. You provided several lease agreements for property A and B which show that the lease terms are on average 6 to 12 months in duration and that the tenants have right to quiet enjoyment. You do not have a business plan, you have advised that the purchase of the properties and potential income was researched thoroughly and planned. You keep and manage records for your activity, using Microsoft software, Excel, Word, Outlook and use File Explorer for storage and backup of leases, emails and spreadsheets on your personal laptop. Income from rental properties For the 20YY income year, your net income from short-term and long-term rental activities were as follows: Short-term rental $X,XXX Long-term rental
$XX,XXX Total $XX,XXX You pay the real estate property managers a percentage of rent received plus minor amounts for advertising, lease preparation and owner statement preparation in relation to your short-term rental properties. You advised that you have no debt, and expenses are minimal, so all lettings and Airbnb are profitable.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 26-31 Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 section 995-1
Subsection 26-31(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states you cannot deduct a loss or outgoing you incur to the extent that it is related to travel if it is incurred to gain or produce assessable income from certain uses of residential premises as residential accommodation. Section 26-31 of the ITAA 1997 applies to travel expenses incurred after 1 July 2017. Travel expenses are the costs of travel, accommodation and meals, to inspect, maintain or collect rent for the property. Residential Rental Property A residential rental property is a residential premises used to provide residential accommodation for the purpose of producing assessable income. A residential premise (property) is land or a building that is: • occupied as a residence or for residential accommodation • intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. For example, a house or a unit used as residential accommodation for the purpose of producing rental income is residential rental property. A caravan or a houseboat is generally not residential rental property.
You can continue to deduct travel expenses relating to your residential rental property if: • you are using the property in carrying on a business (including a rental property business), or • you are an excluded entity. Excluded entity An entity is an excluded entity if, at any time during the income year in which the travel expense is incurred, the entity is: • a corporate tax entity • a superannuation plan that is not a self-managed superannuation fund • a public unit trust • a managed investment trust, or • a unit trust or a partnership, if each of its members are entities of a type listed above at that time during the income year. Carrying on a business Business is defined under section 995-1 of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
Normally the receipt of income from the letting of property to a tenant does not amount to carrying on a business. Whether the activity of letting property amounts to the carrying on of a business will depend on the circumstances of each case. A person who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scale of the rental property portfolio and the nature and extent of the involvement of the owner in the provision of services to the tenants of these properties. Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest states at paragraph 5:
A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. 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 of properties or from a block of apartments, that may indicate the existence of a business. In Commissioner of Taxation v McDonald, B. D. [1987] FCA 318 (McDonald ) Beaumont J made a distinction between property investing and carrying on a business, noting that in the carrying on of a business involving property letting services of the nature of those offered by a boarding house would be expected. This was a significant factor in finding that the taxpayer and his spouse were co-investors in their 2 properties rather than in a business of letting rental properties. This being the case the tribunal affirmed that any assignment of profits or losses was a private arrangement between the parties and did not alter their respective obligations or entitlements for income tax purposes. In Cripps v. FC of T
[1999] AATA 937 (Cripps) the taxpayer and his spouse purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his spouse were passive investors and were not in the business of deriving income from rental properties. The number of the properties involved and the nature and extent of the services offered were key factors in this decision. In Administrative Appeals Tribunal (AAT) case YPFD and FCT [2014] AATA 9 ( YPFD ), the following statement about the tests that are relevant when the issue involves residential rental properties was made: 16. The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include: (a) the nature of the activities and whether they have the purpose of profit-making;
(b) the complexity and magnitude of the undertaking; (c) an intention to engage in trade regularly, routinely or systematically; (d) operating in a business-like manner and the degree of sophistication involved; (e) whether any profit/loss is regarded as arising from a discernible pattern of trading; (f) the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case). In this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour. In Allen v Federal Commissioner of Taxation [2021] AATA 2768 ( Allen
) it was held the applicant was carrying on the business of letting rental accommodation involving nine properties. The applicant had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities undertaken were significant in nature and included the personal involvement of the taxpayer in the planting and maintenance of gardens, cleaning, property repairs and maintenance, lease preparation for and attendance to legal disputes, and extensive development of their existing holdings to accommodate more tenants. It was estimated that the development of their existing holdings would increase their annual rental income by $120,000. The tribunal decision considered the extent and nature of their activity as well as their prospects for profit, and found their activities were more than that of a passive investor. The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11
Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes. • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is repetition and regularity of the activity • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business • whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit • the size, scale, and permanency of the activity, and
• whether the activity is better described as a hobby, a form of recreation or a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. Whether the activity has a significant commercial purpose or character An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability.
For the 20YY income year, you have been letting 3 rental properties, consisting of 5 long-term leases and 1 short-term accommodation. You have 100% ownership of all the rental properties. You have been renting out these properties since they were purchased. You did not have a business plan but have been letting rental properties since 20YY and this demonstrates that you have experience, the number of properties that are being rented out is not considered to be substantial in size and scale and does not show commercial purpose. However, you believed you could and did profit from this activity, providing you with approximately 80% of your income for the relevant income year. You advised you took a hands-on approach to the management and maintenance of your properties; you conducted all maintenance and repairs, with the exception of where a qualified tradesperson was required to carry out the works, you are solely responsible for managing, cleaning and maintaining the Airbnb property, you advised it takes you approximately 5 hours a week. However, this work did not extend beyond what is expected of a prudent property investor to keep their investments properly maintained.
Whether there is a purpose of profit as well as a prospect of profit from the activity A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made. You purchased your first of your current properties in 20YY, and then the following properties in the 20YY income year. You did expand your rental property portfolio in the first three years, but it is not considered to be substantial in size and scale and does not show commercial purpose. In the Allen case the applicant was making a significant profit and undertaking development of existing holdings to accommodate more tenants and increase his income and profit. In your case, you have made a profit in the 20YY, 20YY and 20YY income years. It is also expected that a property investor would intend to make a profit. Whether there is repetition and regularity of the activity Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business. In the Allen
case the applicant was occupied for the larger part of their working week with their extended involvement in the management, maintenance, and further development of 9 properties. You did stipulate the hours spent on average managing the properties as being approximately 5 hours per week on average, however this mostly amounted cleaning and maintaining the Airbnb and attending to maintenance and repairs of the long-term properties. Your commitment to this activity can be considered continuous and regular but not to the same extent as that described in the Allen case. Your physical distance from the properties and your time being spent running your Airbnb activity show that your involvement in the running of the properties is in line with other property investors. Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry.
You outsourced the locating of tenants, maintenance of rent, chasing up of arrears, inspections of the properties, advertising for your long-term rentals to a real estate agent. However, you would perform the majority of repairs and maintenance, with the exception of where a qualified tradesperson was required. You did not offer in-house services for the Airbnb property such as those referred to in the McDonald case and this was considered one of the characteristics of a rental letting business in that case. Your actions and involvement did not go beyond that of an investor. As you were located a distance away from the long-term rentals, you outsourced the finding of tenants and repairs and were carrying on the activity more in line with that of an investor as they generally organise tradespeople to undertake repairs and conduct inspections. Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit.
You use your personal banking account for the income you generate from your properties. You manage your records systematically so you can monitor income and expenses and meet your legal obligations. You use a basic software for your records and income for the property, you use Airbnb booking platform for your Airbnb and the real estate agents manage the long-term rental leases. The size, scale, and permanency of the activity An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. With entire ownership of the 3 properties, which consist of 5 leases and 1 short-term rental which is a part of your residential premises the size of your rental portfolio and the scale of your activity is not consistent with that of a business. The permanent nature of your activity is supported by duration of holding. As noted above you are not operating on an ample scale similar to those in YFPD and Allen , both of whom were considered to be in business with 9 properties apiece, where the case of McDonald
who was considered, an investor had 14 properties. So, whilst scale is a factor, it is not determinative of a business of letting rental properties. Conclusion Your rental letting activity has a purpose of profit and is conducted in a systematic and organised way and on a scale that is more consistent with that of most investors. Your running and involvement of the activity is more consistent with that of an investor than one carrying on a business of letting rental properties. The activity you undertook in managing the rental and maintenance of your properties was part time and consistent in nature with that undertaken by an investor regardless of whether they undertake the activity themselves or through an agent. The significance of these factors in determining if a business is being carried on is underlined by the decisions in the above cited cases. In conclusion single and overall consideration of your case against these indicators gives the impression that you are not in the business of letting rental properties and are a property investor. Additionally, you do not meet the criteria of an excluded entity for the purposes of section 26-31 of the ITAA 1997.
You are a property investor, and you must report income from these properties as an investor, and travel associated with your activity will be considered private and domestic and cannot be claimed in accordance with subsection 26-31(1) of the ITAA 1997.