Are the new rental property tax rules unfair to private investors?

More than two million Australians hold an interest in a rental property.

Proposed changes on tax deductibility will affect some landlords more than others.

Few tears were shed for landlords when Treasurer Scott Morrison announced in May’s Federal Budget that people visiting their residential rental properties would no longer be able to claim the travel expenses as a tax deduction.

It was described as an integrity measure to address concerns that property owners were taking a holiday and claiming the cost on the taxpayer.

Since then, however, equity issues have been raised.

The measure only applies to individual taxpayers, or so-called “mum and dad” investors. Corporations, funds or trusts that own residential property can still claim the deduction, as can individuals who own commercial property.

Do landlords need to visit their properties?

CPA Australia members have raised the issue on behalf of clients who do visit their properties to undertake maintenance, says CPA Australia head of policy, Paul Drum FCPA.

He says that some people might abuse the deduction but others can and prefer to do their own repairs and ensure tenants are maintaining the property.

“One client took flights interstate to track down a tenant who left owing rent, when the property agent said they could not find the person. The client recovered thousands of dollars owed when he located the tenant, and the sole purpose of the trip was to recover the rent,” says Drum.

The lesser of two evils?

Australian Taxation Office statistics for 2014-15 show that more than two million Australians hold an interest in a rental property. This includes about 1.5 million individuals with an interest in one rental property and 383,505 people with two properties. Not all of these would be negatively geared, nor would all be residential properties.

The Federal Government abolished the travel expenses deduction as part of a raft of budget measures to address housing affordability, with the budget papers saying, “As part of the Government’s strategy to improve housing outcomes, this measure will provide confidence in the tax system by ensuring tax concessions are better targeted.”

Revenue of A$160 million is forecast for the 2018-19 financial year.

The Government retained negative gearing in the face of debate about who benefited when landlords were able to claim a tax benefit for the cost of borrowing to buy a property when that cost exceeded the rent they received.

Ken Morrison, CEO of the Property Council of Australia, says that negative gearing is a long-standing and respected part of the tax system.

“It is important that it remain part of the tax system – and that means having public support for it,” he says.

The Council supports removing the travel deduction as a budget integrity measure.

Morrison says changing the rules on rental properties will save the Federal budget A$800 million over the forward estimates, from 2018 to 2021, “an extraordinary sum” for what could be considered minor changes. In addition to the A$540 million saved by the removal of the travel deduction over that period, there is also A$260 million in savings from the budget proposal to remove the depreciation deduction for plant and equipment in a residential rental property, removing the deduction for used assets, but not for new ones. 

Professional Development: CPA Q&A. Access a handpicked selection of resources each month and complete a short monthly assessment to earn CPD hours. Exclusively available to CPA Australia members.

Proposed tax laws may affect sharing economy rentals

CPA Australia acknowledges the integrity issue – that people visiting property abroad or in popular holiday spots such as Queensland’s Gold Coast might not be apportioning the travel cost between visiting their property and taking a holiday at the same time – but argues complete removal for individuals is unfair.

Drum points out that individuals will also be denied recognition of losses and outgoings as part of the property cost base for capital gains tax purposes.

He says the changes may have unintended consequences for sharing economy properties such as the holiday website Stayz and Airbnb.

Many owners regularly visit to clean, replace linen or other supplies, much like the owner of a hotel or motel business, he says.

A Deloitte Access Economics report on the economic effects of Airbnb in Australia found more than one-third of the listings booked for properties are outside major cities. Drum says any negative effects of the tax change could be felt disproportionally in rural and regional Australia “where alternative sources of income are harder to find”.

Related: The black economy taskforce – what it means for accountants and their clients

Is there a compromise solution on property tax changes?

CPA Australia argues that travel expenses should be allowed for individuals but that there should be a cap.

It has proposed two options to Treasury:

  • a benchmark of 7 per cent of rental income, based on the standard real estate commission for managing a rental property
  • alternatively, a A$2000 a year limit, being 6.4 per cent of a A$600 a week rental. The cap should be indexed annually.
The changes, announced on May 9 and proposed in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, have not yet been enacted.

A Treasury consultation on the bill ended in August 2017 and the Australian Taxation Office is warning taxpayers that the proposals could affect 2017-18 tax returns.

Read next: What you should know about the risks of the property market

Like what you're reading? Enter your email to receive the INTHEBLACK e-newsletter.
Like what you're reading? Enter your email to receive the INTHEBLACK e-newsletter.
October 2021
October 2021

Read the October 2021 issue of INTHEBLACK magazine.

Each month we select the must-reads from the current issue of INTHEBLACK. Read more now.