As per recent law, travel expenses regarding inspection, maintenance and collection of rent of rental property will not be allowed (Li & Whitworth 2016). This amendment has been done with the objective to develop reliable method to deal with the concerns that taxpayers claim deductions of travel expenses without correct allocation cost, or having claims of travel costs for private purpose of travel. The present study is based on an evaluation of recent amendment provided by budget in Australia regarding disallowance of travel deductions. The study will include a description of the amendment and its justification. In addition to this, the impact of this amendment will be stipulated on the housing market of Australia.
Previous legislation regarding travel and car expenses
If an individual travels in order to examine or property maintenance or accumulating the rent, they might be capable of claiming the travelling considering as a deduction. They are legally permitted to take a total deduction in which the only reason for the trip is regarding the rental property (James, 2016). Conversely, in, certain circumstances individual is unable to claim a deduction or may be allowed to do deduction partly because the trip was for multiple purposes. However, if an individual gets a flight to the rental property, stays there all night and return back home on a particular date, all the hotel and airfare expenses will usually be accepted as a deduction for the only reason of the trip that was to examine the rental property.
Proposed Law: prohibits the travel expense deduction for housing rental property
By considering the initiative dubbed “Reducing pressure on housing affordability”, it has been announced by the Federal Budget 2017-18, from 1 July 2017, Government will prohibit travel expense deduction regarding inspection, maintenance or accumulation of rent for a housing rental property (Source: Budget Paper No 2 [p 29]). This measure is also applicable to gather rent on a particular housing property (Bayes and et al., 2016). By considering the concerns of Federal Government, as per this change residential investment properties owners might claim travel expenses without the proper allocation of costs or have claims of travel costs for a private purpose, and travel costs regarding inspection, maintenance or accumulation of rent for a housing rental property will be prohibited from 1 July 2017 (Australian taxation office, 2017).
For the implementation of this measure, ED legislation had proposed for insertion of insert new section 26-31 into the Income Tax Assessment Act 1997 (ITAA 1997) which will be applicable for 1 July 2017 (Deloitte, 2017). Disallowance is associated with the travel expense occurred to gain or produce assessable income by making use of residential premises or accommodation and not mandatorily incurred by carrying on business with the objective to gain or produce assessable income (Fishman, 2017).
In accordance with the view point of regulatory authorities amendment related to the housing market is justified because it assists the government in the prevention of evasion of the law. The measure is all about to deal with concerns that taxpayers are claiming deductions for travel expenses without correction of allocation cost or having claims of travel costs for the private purpose of travel, said by the budget papers (Fishman, 2016). Being a part of the strategy of the government to improve the outcomes of residential, this method will give self-assurance in the tax measure by making sure that the allowances are well targeted. However, it is not applicable to business properties. Currently, expenses regarding travel expenses claims are for inspections, although in reality, vacations and holidays are costing $160 million in a year or more than this for the government.
This method will not avoid investors from involving third parties like agents of real estates for management of property services. However, these all expenses will stay deductible.this method is calculated in order to gain profit of $540.0 million on the onward periods of estimates (Brennan & Siagian, 2016). In addition to this, the cited approach of the federal government will prevent manipulation of accounts by restricting tax payers for adding their personal expenses as rental charges.
According to viewpoint of treasurer, allowance of this expense is severely abused due to which it has been allowed. However, in this aspect various relief is provided for genuine expenses such inspection cost (Chardon, Freudenberg & Brimble, 2016). As per recent provisions, if inspection is carried by third party then expense will be permissible but assesse must ensure that incurred must be supported by sole purpose of inspection (IBDO Australia, 2017). With this amendment, Australian government had curtailed deductions of discretionary expenses which can lead to losses related to negative gearing. Further, with these integrity measures, confidence of taxpayers will be boosted along with reducing cost of negative gearing to the fiscal Budget. It is because; auditors and authorities will crucially scrutinize overnight travel expenses and in case of any manipulation there will be tax penalty.
As per the amended law, travel expenses will be deductible only if these are ordinary nature and compulsory to occur. This aspect clarifies the fact that the expenses associated with travel must be supportive and suitable for the rental activity and not inevitably indispensable from the view point of taxpayer (Fishman, 2017). In previous law there was no such clarification due to which various landlords were taking unjust benefit of loophole in taxation provisions and were deducting personal expenses as rental charges. Consequently, amendment clarified to landlords that traveling to a rental property will not be considered ordinary and necessary in all cases.
This can cause a considerable effect on owners of residential investment property who manages their property by themselves which they own in countryside areas, throughway or mining towns (Ong and et al., 2017). Taxpayers who are legally incurring travelling costs in order to constantly examine or take on maintenance of properties in the country, distant or throughway places (Australian taxation office, 2017). That might require searching for a trustworthy manager of the property in order to manage the property to acquire costs deduction related to maintaining renting the property.
In accordance with the study of Chung (2017), there are 2 million landlords in Australia out of which, approximately 1.3 million are destructively geared by this amendment. Further, Government of Australia is likely to carry out an added $540 million in proceeds for the travel changes in the upcoming four years (Beale, Financial & House, 2016).
According to the recent statistics of ATO there were approximately travel expenses of $455,861,897 regarding rental property made by individuals in 2014-15. In this amount also all expenses were not related to residential property (Bayes, McClure & Parker, 2016). This approach comprise lot of money but it is comparatively small in terms of big deductible rental property outlays such as council rates, repairs and maintenance, plant depreciation, body corporate fees, interest, capital works deductions, property agent fees, water charges, insurance and land tax (Croker, 2017).
Apparently it shows that the ATO is worried merely about the growth in travel deductions claimed, but also about the genuineness of concerned claims. This factor shows that on an overall basis this change will not affect overall value and transactions of housing market as capital aspects of property is not affected (Chardon, Freudenberg & Brimble, 2016). However, it will negatively affect some honest tax payers as they cannot deduct justified expenses related to rental property but same will be allowed there is justified measure for allowance such as document to proof nexus among expenses and its reliability to rental property. It has been estimated by ATO, that this amendment will provide revenue saving of amount $160 million and revenue of $540.0 million over the forward following financial years:
Table 1: Estimation of revenue with amendment of disallowance of travel expenses
(Source: 2017-18 Budget Paper No. 2 – Revenue Measures (page 29))
|
201617 |
201718 |
201819 |
201920 |
202021 |
|
|
Australian Taxation Office |
.. |
$160 million |
$180 million |
$200 million |
Conclusion
The budget of 2017 seems to rule becoming more stiffen regarding the claims that can be made by investors having a significant investment in property, especially associated with depreciation deductions. In accordance with the present study, the conclusion can be drawn that amendment of disallowance of travel expenses in Australian taxation provisions is viable. It is a reliable method to deal with the concerns that taxpayers claim deductions for travel expenses without correct allocation cost, or having claims of travel costs for the private purpose of travel. However, it will negatively affect some honest tax payers as they cannot deduct justified expenses. This amendment will have significant adverse effect on the housing market as 1.3 million Powerful groups of Australia are negatively geared landlords which will now unable to claim travel costs for examining their housing properties.
References
Books and Journals
James, K. 2016. The Australian Taxation Office perspective on work-related travel expense deductions for academics. International Journal of Critical Accounting, 8(5-6), 345-362.
Bayes, A. J., McClure, G., and Parker, G. B. 2016. Differentiating the bipolar disorders from borderline personality disorder. Acta Psychiatrica Scandinavica, 133(3), 187-195.
Fishman, S. 2016. Every Landlord’s Tax Deduction Guide. Nolo.
Brennan, P., and Siagian, F. 2016. Business Travel or Recreation: The RV Case. Journal of Case Studies, 34(1), 58-72.
Beale, H., Financial, O., and House, H. 2016. BUDGET.
Chardon, T., Freudenberg, B., and Brimble, M. 2016. Tax literacy in Australia: not knowing your deduction from your offset.
Ong, R., Dalton, T., Gurran, N., Phelps, C., Rowley, S., and Wood, G. A. 2017. Housing supply responsiveness in Australia: distribution, drivers and institutional settings.
Li, Y. T., and Whitworth, K. 2016. When the State Becomes Part of the Exploitation: Migrants’ Agency within the Institutional Constraints in Australia. International Migration, 54(6), 138-150.
Chung, E. 2017. Travelling costs and the new withholding tax on a property purchase. REIQ Journal, (Feb 2017), 34.
Online
Australian taxation office. 2017. Disallow the deduction of travel expenses for residential rental property. Retrieved from https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-individuals/Disallow-the-deduction-of-travel-expenses-for-residential-property/
Croker, M., 2017. Taxing travels. Chartered Accountants. Retrieved from: https://www.google.co.in/url?sa=t&rct=j&q=&edata-src=s&source=web&cd=9&cad=rja&uact=8&ved=0ahUKEwjZtNHY1Y3WAhWCurwKHaq1B68QFghuMAg&url=https%3A%2F%2Fwww.charteredaccountantsanz.com%2F-%2Fmedia%2Fc8713af081974f88a33fbfdba4019df1.ashx&usg=AFQjCNEQaM4T9ekQSQFCzM0FVPZ0XtHdEw
Deloitte, 2017. Denial of deductions on residential investment properties. Retrieved from: https://www.taxathand.com/article/7206/Australia/2017/Denial-of-deductions-on-residential-investment-properties
Fishman, S., 2017. Deducting Landlord Out-of-Town Travel Expenses. Retrieved from https://www.nolo.com/legal-encyclopedia/deducting-landlord-out-town-travel-expenses.html
IBDO Australia. 2017. Removal of expensive deductions for rental properties. Retrieved from https://www.bdo.com.au/en-au/federalbudget2017/housing-affordability/removal-expensive-deductions-rental-properties
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