Taxpayers not following rules when claiming travel expenses related to residential rental properties – ATO blog image

Taxpayers not following rules when claiming travel expenses related to residential rental properties – ATO

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Not long ago, the Australian Taxation Office (ATO) reported considerable non-compliance with their new policy that prevents taxpayers from claiming travel expenses connected to residential rental properties.

The ATO made changes to this law which now prohibits investors from claiming travel expenses that are related to inspecting, maintaining, as well as collecting rent payments as deductions, except if the taxpayer is actually conducting a rental property business or is an excluded entity.

The law was put forward to deal with taxpayers who were claiming travel deductions without properly allocating costs where there was a private component to the travel, or they claimed travel expenses that were solely used for personal reasons.

However, the ATO has found that 26,000 taxpayers still incorrectly claimed deductions when it came to travel to residential rental properties during the course of tax time 2018.

Exemptions to the rule for residential rental properties

Investors below who own and manage residential rental property are able to continue to claim travel deductions.

  • Corporate tax entities such as companies, corporate unit trusts, corporate limited partnerships, and public trading trusts
  • Superannuation strategies that are not a self-managed super fund (SMSF)
  • Managed investment trusts
  • Public unit trusts
  • Unit trusts or partnerships in which any entity is part of the classifications listed above
  • Taxpayers engaging in a commercial business of renting residential properties such as motels, hotels, and boarding houses

While there have been several court cases regarding the argument that a taxpayer who owns a portfolio of stand-alone residential properties could perhaps be considered as carrying on a business of leasing residential properties, it would still depend on individual circumstances.

Capital Gains Tax (CGT)

Travel expenses that cannot be deducted per the ATO’s new rules may not form part of any element of the cost base or reduced cost base of residential properties for CGT purposes. As a result, the travel expenditures that are no longer considered on a taxpayer’s revenue account are also prevented from being recognised on their capital account.

Broad in scope

The ATO’s new legislation has a wide reach since it also rejects deductions for travel carried out that’s associated with a property, but not the actual property itself. For example, visiting the property manager to talk about the property or travelling to purchase and install equipment used in the rental property cannot be claimed as deductions.

In addition, travel expenses in relation to property investments such as motorised vehicle expenses, public transport expenses, hire-car expenses such as Uber and taxis, as well as meals and accommodation pertaining to the travel are no longer allowed to be claimed as deductions.

What can be claimed?

The new legislation, however, does not apply when you visit a tax agent for the intentions of preparing and lodging an income tax return that involves rental income and deductions. The reason is that these types of expenses connect to the management of your income tax affairs, which is made particularly deductible under the present guidelines. Also, this type of travel expense is not to gain or produce assessable income from using residential properties for residential accommodation.

Further, you can continue to claim a deduction for the expense of hiring specialists to perform jobs on your behalf such as real estate agents for property management services or tradespeople for repairs and maintenance.

If you need assistance on how to legally minimise your property tax, contact a Chan & Naylor property tax accountant here today.

Besides property tax accounting, take a look at our other accounting and advisory services that can help you to achieve greater success.

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