‘Holiday over’ for investor trips to residential rental properties

An important reminder for property investors is that trips to visit residential rental properties are no longer tax deductible. There are some exceptions but individuals and SMSFs with one or more rental properties are not considered to be in the business of letting rental properties for related travel expenses incurred from 1 July 2017.

Under the changed legislation, you are no longer able to claim any deductions for the cost of travel you incur relating to your residential rental property unless you are carrying on a business of letting rental properties or are an excluded entity.

What does it mean to be carrying on a business of letting rental properties?

Gold Coast investment propertyGenerally, owning one or several rental properties is not considered being in the business of letting rental properties, according to the ATO.

The receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business of letting rental properties. This means that as their activities are generally considered a form of investment rather than a business, deductions for travel expenses are not allowed.

Where some investors may have purchased residential properties in popular holiday locations like the Gold Coast, partly because of the ability to take an annual tax-deductible trip for the purpose of inspecting or maintaining the property, the loss of this potential lifestyle advantage at the end of the financial year 2016-2017 may have been disappointing. Indeed, the owners of residential rental properties in any far-flung location may have found their investments more costly to manage and maintain, which in effect can decrease the return on the investment.

However, the changed legislation may have helped level the advantages for some residential rental property investors and could encourage more people to purchase investment properties that are closer to their home.

Example: An individual with residential investment property in 2017–2018

Justine rented out her residential rental property in 2018–19. During the year, she travelled to the property to repair damage caused by tenants. Because the investment is a residential property, Justine cannot claim her travel expenses.

Which entities are excluded from the changed legislation?

While all residential rental property-related travel expenses for individual and SMSF investors are disallowed, there are some exclusions. An excluded entity is a:

  • corporate tax entity (eg: residential rental properties owned by a company)
  • superannuation plan that is not a self-managed superannuation fund (SMSF)
  • public unit trust
  • managed investment trust
  • unit trust or a partnership, all of the members of which are entities of a type listed above.

Example: An excluded entity with a residential rental property investment

Justine’s Investments Pty Ltd incurred travel expenses in 2017–2018 when the property manager was tasked with inspecting a residential property investment that is currently tenanted. Justine’s Investments Pty Ltd is a corporate tax entity (a company) and can claim a deduction for related travel expenses.

If you have residential rental property under an excluded entity or would like to know more about investing in residential rental property as an excluded entity, talk to us. Billings + Ellis can give you advice that’s specific to your investment needs and circumstances.