There is a general legal principle that allows you to claim a tax deduction, which is this: the relevant cost must be incurred in the course of you producing your assessable income, to the extent that the cost is not capital, private, or domestic in nature.
In other words, any non-capital and non-private cost you incur that is related to deriving rental income from your investment property will generally be tax deductible – provided you can establish a direct nexus between the cost and the earning of your rental income.
The same principle applies to travelling costs you incur that are related to your investment property.
The key question you need to ask is: Is there a direct connection between the travelling costs and me earning income from my investment property, and to what extent were the expenses incurred in the process of earning that income?
As simple as this question may appear, it is not always easy to determine whether the travelling costs you incurred were directly related to earning income from your rental property, and that the costs or part of the costs would not be treated as private or domestic expenditure.
Perhaps the most salient point is that the travelling costs must be incurred when you are in the course of earning the rental income. In that regard, it is generally accepted that once your investment property is available for rent, as distinct from it actually being rented out, you are considered to be in the course of deriving rental income.
What this practically means is that
if you incur travelling costs at the time when your property is available for rent, which may be evidenced by your property manager having listed your property to procure tenants from the public at large, the travelling costs should be tax deductible. The same applies if you incur travelling costs to maintain the property (eg cleaning, gardening, repairing) while it is available for rent or actually being rented.
Tax deductible reasons for travelling to visit your investment property
Travelling costs you incur will generally be tax deductible if they are attributable to a period during which the property was rented out to tenants, or even after the tenancy has ended, including travelling to the property to:
• fix up the property in between tenants
• inspect the property at the end of a tenancy
• undertake repair work on the property due to wear and tear caused by tenants while the property was rented out
However, applying the same principles, travelling costs will not generally be tax deductible if the costs are incurred when you:
• inspect the property before you have actually bought the property
• negotiate with a seller in the course of buying the property
• inspect the property or travel to the property to ready it for rent but before the property has become available for rent
• negotiate the sale of the property
Importantly, the above applies regardless of where the property is physically located.
Having said that, if the property is located far away from where
you live and you have to undertake extensive travel to get to the property (ie travel that involves being away from home for at least one night), you will be required to substantiate the travelling costs, in addition to keeping the normal documentary evidence to substantiate the costs (such as the invoice for your airfare and accommodation, receipts for fuel you bought from a service station, etc).
For completeness, tax-deductible travelling costs are not limited to trips to and from your investment property. Travelling costs associated with you collecting rent from, say, your property manager and meeting with your accountant to discuss your tax affairs will also be deductible, subject to you satisfying the substantiation rules as detailed above.
THE 6-NIGHT RULE
New withholding tax on property sales and purchases
If the trip requires you to travel away from home for six nights or more in a row to a location either inside or outside of Australia, you are required to keep a detailed travel diary of your trip to substantiate the purpose of the trip. To that end, if you undertake the trip for multiple purposes, eg you use part of the trip to inspect your investment property and you also have a holiday, then you need to apportion the travelling costs on a reasonable basis to only claim the portion of the costs that relate to your investment property.
From 1 July 2016, new tax rules apply to any real property contract entered into on or after that date, when the market value of the property is $2m or more. In normal circumstances when the seller and buyer have negotiated the purchase price on an arm’s length basis, this price will be accepted as the property’s market value.
How are buyers affected?
The new rules will require a buyer to withhold 10% of the purchase price of real property valued at $2m or more and pay that amount to the ATO upon settlement, unless the seller provides a Clearance Certificate to the buyer on or before settlement.
The Clearance Certificate is obtained from the ATO and certifies that the ATO considers that the seller is an Australian tax resident. Upon receipt of a Clearance Certificate, the buyer’s obligation to withhold will be discharged.
Without a Clearance Certificate, the buyer’s statutory obligation to withhold will apply, regardless of whether the seller is a resident or non-resident of Australia for taxation purposes. This is an important point because many people think the new rules are only targeted at collecting tax from foreigners who own properties in Australia. In contrast, the rules apply to everyone, regardless of their tax residency status in Australia.
On the other hand, if the seller is a non-resident and the tax payable on the sale of the property is less than 10% of the market value, they can obtain a Rate Variation from the ATO and provide it to the buyer before settlement. The buyer will still have an obligation to withhold, but the amount to be withheld will be based on a lesser (ie less than 10%) withholding rate as determined by the ATO in the Rate Variation.
If the buyer has failed to withhold the relevant amount at settlement and pay it to the ATO, a penalty for failing to withhold equalling the amount that was required to be withheld may be imposed on the buyer, together with an administrative penalty and general interest charges.
Therefore, as a buyer of a property, if you are not aware of these rules and have failed to withhold tax where it is required, it could cost you plenty.
How are sellers affected?
A seller who is selling a property with a purchase price of $2m or more under an arm’s length transaction may apply for either a Clearance Certificate or a Rate Variation from the ATO, which should be provided to the buyer before settlement. Otherwise the buyer will withhold tax from the sale proceeds at settlement.
The seller may apply for a Clearance Certificate at any time, but the certificate is only valid for 12 months and must still be valid at the time the certificate is provided to the buyer.
The ATO will only issue a Clearance Certificate to a seller who is a resident for Australian tax purposes. Once an application for a Clearance
Certificate has been submitted, it will usually take a few days for the ATO to issue the certificate. However, in less straightforward cases, the certificate may take up to 28 days to be issued. Complex cases may take even longer.
If the seller is not entitled to a Clearance Certificate but believes the default 10% withholding rate is inappropriate, the seller may apply for a Rate Variation from the ATO. Provided the variation is given to the buyer before settlement, the buyer will be required to withhold tax at the lesser rate on the Rate Variation. The variation will be issued within 28 days in the majority of cases.
If tax has been withheld from the sale proceeds, the seller may offset the withheld tax against their Australian tax liability on the sale of the property when they lodge their Australian tax return, regardless of whether the sale has given rise to a capital gain or revenue in the hands of the seller. Any excess above the seller’s tax liabilities will be refunded to the seller.
Therefore, as a seller of a property, if you are not aware of these rules you could find yourself not receiving the full proceeds on the sale of your property on settlement, which could cause other headaches that could potentially have been avoided.
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