New laws have been enacted ending tax deductions for rental property related Travel, and Fixture and Fitting Depreciation (from 1 July 2017).
The owners most affected will be individuals, family trusts and self-managed super funds buying used rental properties.
The laws follow a 2017-18 Budget announcement aimed at improving housing affordability.
Essentially, the new rules apply to expenditure outlaid from 1 July 2017 connected to travel and depreciation. There are however broad exclusions for Institutions, Ordinary Companies, and Businesses who can continue to claim these deductions creating something of an un-level playing field.
Travel related to Rental Properties
Travel expenses related to producing rental income from residential premises are:
- not deductible (either under the ordinary deduction rules or as “Black Hole” Expenditure); and
- not recognised in the cost base of the property for Capital Gains Tax (CGT) purposes.
Before the new laws were introduced, owners were entitled to claim travel costs to inspect properties, and for meetings with property managers, Body Corporates and the like.
These travel costs will no longer be deductible.
The new rules do not apply to Institutional Investors nor Corporate Tax Entities. “Institutional investors” usually operate under a corporate structure, or are public unit trusts, managed investment trusts, or are unit trusts or partnerships that are ultimately held by these entities, or meet the description of being a ‘superannuation fund’ but do not include ‘self-managed superannuation funds’.
This means that the owners most affected will be individuals, trusts and self-managed super funds holding residential property.
The exclusion for Corporate Tax Entities means ordinary companies can continue to deduct travel expenses, but this exclusion does not apply to a trust simply because the trustee of the trust is a company.
The amendments also do not affect deductions for travel expenditure incurred in carrying on a business, including where an entity carries on a business of providing property management services.
Whether a business is being carried on depends on the facts of each case. Some indicators that the courts have considered relevant are:
- The activities have a profit-making purpose;
- The complexity and magnitude of the undertaking:
- An intention to trade regularly, routinely or systematically:
- Operating in a business-like manner; and
- The volume of the operations and the capital employed
It is almost certain that owning one or two rental properties will not qualify as “carrying on a business”, but following the case of YPFD and Commissioner of Taxation  AATA 9, it is possible to hold just a few more rental properties, and even employ a manager and run at a loss and then qualify as “carrying on a business”.
Depreciation related to Rental Properties
New rules also deny income tax deductions for the decline in value of ‘previously used’ fixtures and fittings used in residential rental properties. Depreciating assets or ‘plant and equipment’ are fixtures and fittings that are used in connection with the rental property but do not just function as part of the structure of the property.
The new rules remove depreciation deductions on rental property Fixtures and Fittings paid on or after 1 July 2017 (unless the plant and equipment was acquired under a contract entered into before 9 May 2017).
The practice of obtaining a Quantity Surveyor’s report to list and value used Plant and Equipment and then to start depreciating it will no longer be possible.
To depreciate Fixtures and Fittings now, the owner must generally be the first person to use or have them installed ready for rental purposes.
However, Owners can also depreciate Fixtures and Fittings that were installed ready for use in new residential premises they acquire (assuming again that they were the first to deduct any amount for the decline in value of the asset), or if tenanted when they acquire the property, the property was “new” within 6 months of the purchase (so the tenants must have been living there less than six months).
The owner must also not have used or installed the Fixtures and Fittings in their own residence nor have used them for any other purpose (except for incidental or occasional use). Naturally, selling used Plant and Equipment between properties and re-depreciating it will also not be possible.
“Occasional use” where that use is infrequent, minor and irregular is not treated as “previous use”. And the Explanatory Memorandum to the legislation states that spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home would generally count as “occasional use” of any Fixtures and Fittings.
Just as purchasers of new and unoccupied residential premises will be entitled to depreciate the Fixtures and Fittings, the Explantory Memorandum to the new legislation extends this to substantially renovated premises (para 2.46) provided that no one had rented or resided there between the renovations and sale.
As with the new restrictions on travel claims, the depreciation changes do not affect deductions that arise:
- in the course of carrying on a business;
- for corporate tax entities, superannuation funds (apart from self‑managed super funds), public unit trusts, managed investment trusts and unit trusts or partnerships, all the members of which are entities of a type listed here; or
- assets acquired by an landlord before, or under a contract entered into before, 7.30 pm on 9 May 2017.
Foreign Landlord Vacancy Fee
An annual vacancy fee on foreign owners of residential real estate where residential property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.
If the owner or a relative occupies their dwelling for 183 days or more in a 12 month period, they will not be liable to pay the vacancy fee.
If the dwelling is subject to lease/s or licence/s with a minimum duration of 30 days which total 183 days in a 12 month period, then the owner will also not be liable to pay the vacancy fee.
A foreign person must give the Commissioner of Taxation a ‘vacancy fee return’ in the approved form to advise the number of days a residential property was occupied in a 12 month period (with this ‘vacancy year’ starting on the date that the property is acquired).