New legislation is now in place to deny deductions for residential property investors on travel expenses incurred in inspecting their residential rental properties and depreciation on “previously used” plant and equipment. This applies to individuals, discretionary trusts and SMSFs (but not companies) and is effective from 1 July 2017.
The first measure applies to deny deductions on travel expenses, such as motor vehicle expenses, taxi or car hire costs, airfares or public transport costs, and meals or accommodation related to the travel. Further, these expenses cannot be included in the cost base or reduced cost base of the investment property. However, property management expenses paid to real estate agents (including travel expenses incurred by real estate agents to inspect the residential rental property) are still deductible.
The new rules do not apply to taxpayers that carry on a business of property investing, a business of providing retirement living, aged care or student accommodation or property management.
The ATO has recently issued the draft Law Companion Ruling LCR 2018/D2 to provide guidance on the new rules. The Ruling states that “residential premises” has the same meaning as used in the GST Act and refers to the indicia of business identified by the courts and listed in Ruling TR 97/11 for the meaning “carrying on a business”. The Ruling also states that apportionment is required if there are mixed income-producing purposes for the travel expenses and must be done on a reasonable basis.
The second measure applies to deny affected taxpayers depreciation deductions on “previously used” plant and equipment purchased after 9 May 2017. This applies where a taxpayer:
- purchases a residential property with existing plant and equipment; or
- has previously used the plant & equipment in their residence or for a non-taxable purpose.
However, affected taxpayers can still claim depreciation deductions on both new and previously used plant and equipment acquired before 9 May 2017 and new plant and equipment purchased after 9 May 2017. Further, if a taxpayer purchases a new residential premise, the plant and equipment installed by the developer is not taken to be “previously used” and depreciation deductions can still be claimed.
If you have any queries on the subject, please contact Peter Hong.